VeriFone Systems, Inc.

Transcription

1 April 13, 2012 Financials VeriFone Systems, Inc. Ticker: PAY Current Price: $51.42 Recommendation: Buy Implied Price: $77 Key Statistics 52 Week Price Range 50-Day Moving Average Estimated Beta Dividend Yield Market Capitalization 3-Year Revenue CAGR Trading Statistics Diluted Shares Outstanding $ $30.25 $ N/A $5.49 billion 12.25% million Investment Thesis VeriFone Systems is in the midst of becoming a value added electronic payment service provider, adding media and advertising to its payment terminals Credit card companies requirement of using EMV enabled card terminals by 4Q 2015 will rapidly increase the electronic payment terminal refresh rate Changes in emerging market spending habits from cash to credit and debit cards will drive international revenue growth VeriFone 5-Year Performance Average Volume (3-Month) million $ ,000,000 Institutional Ownership Insider Ownership 91.34%.03% $ ,000,000 EV/EBITDA Est 15.9x $ ,000,000 Margins and Ratios Gross Margin 41.7% $ ,000,000 EBITDA Margin 12.8% $ ,000,000 Net Margin Debt to Enterprise Value 21.7% 20.6% $ ,000,000 Leverage Ratio 8.87x $0.00 May-06 Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 Sep-11 0 Volume Price 50-Day Avg 200-Day Avg Covering Analysts: Owen Hyde & Steven Enders 1 University of Oregon Investment Group

2 Business Overview VeriFone Systems, Inc. is a global leader in secure electronic payment solutions and services, providing its customers with electronic point of sale payment devices. These devices utilize VeriFone s security, encryption and payment software to ease the system of payment for consumers, businesses and financial institutions. VeriFone has a diverse array of products for any level of financial sophistication, including basic magnetic strip signature, PIN based credit and debit cards, newer contactless/radio frequency identification cards (RFID), near field communication (NFC) enabled mobile phones and the new international standard Europay, MasterCard and Visa (EMV) smart cards. The increased importance of EMV terminals will be one of the primary revenue growth drivers for VeriFone in the next three years. VeriFone provides services to financial institutions, payment processors, petroleum companies, large retailers, government organizations, healthcare companies and ISOs (Independent Sales Organizations), which sell VeriFone products to smaller merchants. Services 2011 Revenue 20.7% System Solutions 79.3% of 2011 Revenue VeriFone identifies its System Solutions segment as the sale of electronic payment systems and solutions that enable secure electronic payment transaction. This segment entails the direct use of VeriFone products. This segment derives its revenue from the sale of a variety of VeriFone products to retailers as well as the service it provides as an intermediary between retailers and financial institutions. System Solution 79.3% Revenue generated from this segment can either be attributed to the sale of a variety of terminals or from the service these terminals provide. These terminals may have many different functions depending on which industry needs the terminal. Many retail industries use an interface with both a PIN and signature screen where a card is swiped and the magnetic strip is read. The gasoline industry uses a similar interface but many are now adding additional screens for advertisement purposes, a potential Service revenue driver (see below). Over 65% of gas stations use VeriFone s Gemstone line of terminals. The market for electronic payment terminals is at an influx and ready for rapid change from new technologies and new systems put in place in the United States. This new technology and service will drive revenues going forward as businesses need to replace their terminals. The interface and technology will change, with more Wi-Fi, NFC and EMV features to be implemented. Many businesses will implement NFC and EMV features at the same time in order to cut down on the costs associated with buying new terminals. Wi-Fi and other wireless terminals are expected to be widely used in both the restaurant business and the small retail business. At your table terminals are expected to be widely implemented by the end of These terminals will cut UOIG 2

3 down on fraud and security costs. Many small, service oriented boutiques are moving towards using multiple mobile terminals attached to iphones or ipod touches. Such stores believe it will cut down on theft as well as add an extra layer of service. VeriFone s PAYware Mobile Enterprise devices work with these customers devices. VeriFone has made recent acquisitions that will expand the service provided to mobile customers. This service is similar in scope to those used by both Square and Intuit. VeriFone provides its retail customers with cardholder data security software called VeriShield Protect. This software shields merchants from access to detailed consumer data while also limiting their fraud liability. 80% of all US credit card volume uses VeriShield. Services 20.7% of 2011 Revenue VeriFone identifies its Services segment as warranty and support services, field deployment, advertising and transaction fees, installation and upgrade services and customer specific application development. One of VeriFone s biggest drivers for growth will be from its advertising and customer specific application development. Both of these will have large gains from the ever growing VeriFone Media. VeriFone Media is VeriFone s advertising business, displaying digital content on video screens on and in taxis as well as on payment terminals (Payment Enabled Media). Digital media is delivered using its media platform, VNET. These devices show a variety of different information, such as deals from Groupon, a variety of local deals and traditional advertising. This media targets demographics based on psychographics, time of day and real time locations. These revenues will grow as businesses begin to change out their old terminals and begin to use newer digital media enhanced terminals. These terminals could be used in a variety of locations including taxis, gas stations, convenience stores, grocery stores, retail locations and restaurants. Much of VeriFone s sustainable revenue growth will come from this segment of the business. VeriFone will be continuously expanding the number of terminals with digital media and has made numerous acquisitions to positions itself in the retail advertising and taxi advertising industry. VeriFone is currently the largest taxi cab advertiser in New York with many of these same taxis using VeriFone payment terminals as well. This segment operates at slightly higher margins than the System Solutions segment but is also much smaller in terms of total revenue. Management expects long term Services revenue to be equal to System Solutions revenue. UOIG 3

4 Strategic Positioning VeriShield Protect has become the standard for point to point encryption with major processors, giving VeriFone nearly 80% of all credit card transaction volume in the US Segment Revenue North America EMEA Latin America Asia VeriFone has multiple sales forces for each specific category of business, including financial institutions, payment processors, third party distributors and value added resellers. Many teams target specific markets, such as petroleum, retail, restaurants, banks, self-service kiosks, transportation and digital content providers. Roughly 70% of sales are attributable to VeriFone s sales staff, with the remaining 30% coming from ISOs. Nearly 650 employees are dedicated to sales. VeriFone develops all of its technology in house and has R&D in order to increase its security and protect its clients better. The innovation will limit security threats and allow VeriFone to keep its customers protected. Software needs updating for all lines of its business. Business Growth Strategies While the main driver for revenues in the next few years is the installation of EMV enabled terminals, VeriFone believes they will see great revenue growth as well from the service segment. The service generates revenue from companies wanting to advertise on VeriFone terminals in high customer attentive areas such as taxi cabs, gas pumps and retail checkout lanes. These terminals present targeted and relevant advertising, offers and coupons to the consumer. Acquisitions VeriFone has a history of growing its business geographic control and products through acquisitions. In 2006 VeriFone acquired Lipman Electronic Engineering, which developed, manufactured and marketed a variety of terminals. In 2011 VeriFone completed four acquisitions. These included Hypercom Corporation (Hypercom), Destiny Electronic Commerce (CSC), Gemalto s point of sale solutions business and Point International (Point). Hypercom was a global provider of electronic payment solutions and value added services. CSC was a provider of payment technologies, services and solutions at the point of sale, also providing value added services to customers in Sub-Saharan Africa and the Indian Ocean. CSC also develops software applications for card industry specifications. The acquisition of Gemalto POS gave VeriFone greater access to customers in the Middle East, South Africa and India. The acquisition of Point gives VeriFone the largest provider of payment and gateway services in Northern Europe. Point provides its customers with POS UOIG 4

5 tech and support, gateway services, card encryption services and e-commerce processing. Point is a leader in the rising NFC mobile commerce industry and one of the leaders in the EMV payment system readily available in Europe. This acquisition will help smooth the implementation of EMV into the US market. These acquisitions show VeriFone s vision of creating a highly innovative and global payment infrastructure, expanding the alternative payment industry (NFC and RFID) throughout the world. VeriFone believes the industry is moving towards these mobile payment methods offered by traditional credit card companies as well as new entrants like Google, PayPal and Isis. VeriFone routinely makes many small acquisitions in order to continuously innovate. So far in fiscal year 2012 (beginning November 1, 2011) VeriFone has made four acquisitions; it acquired Show Media, Global Bay, ChargeSmart and LIFT Retail Marketing. Show Media is a taxi advertising business based in New York City. This acquisition expands its geographic location for its taxi advertising services and brings the number of taxi tops to 25,000 and more than 30,000 digital media enabled taxi payment systems in the United States. Global Bay is a mobile POS software business. Global Bay produces phone apps that help mobile devices conduct financial transactions. This acquisition will help with the move towards DFC transactions as well as mobile POS sales associated with tablets and smartphones. The acquisition of ChargeSmart is similar to the acquisition of Gobal Bay. VeriFone acquired LIFT Retail Marketing to expand its ad space in gas stations and convenience stores. These terminals analyze what people buy and suggest which products they may also like. These terminals can increase an average store s sales by 5 percent according to a VeriFone Executive (Bloomberg). VeriFone CEO Douglas Bergeron said the company could spend as much as $1 billion annually on acquisitions in emerging markets and data services. Organic Growth VeriFone is currently active in over 110 countries but many emerging markets have limited numbers of credit card processing facilities. VeriFone believes it can further penetrate these markets although it faces some competition from regional providers. As demonstrated by the graph to the left, VeriFone can make large inroads in many developing countries, particularly China, Russia and Latin America. People in developing markets will require safer ways to pay for goods and services instead of cash, necessitating electronic payment terminals. VeriFone will see continued growth in developed markets, particularly the US, through the sale of EMV and NFC terminals with enhanced digital media displays. These displays will grow service revenues in the coming years to the point where System and Service revenues are expected to be even by management. UOIG 5

6 Industry Overview The electronic payment and point of sale industry has rapidly been expanding internationally as more and more consumers are moving towards electronic transactions instead of cash. As emerging markets continue to develop, the need for electronic transactions for safety and security will drive terminal and security revenues. The market is looking to become more vertically integrated in developed markets by tapping into the demand for advertising and other services in taxis and gas stations. One of the key developments in the US card market is the wide implementation of EMV terminals in the coming years. Both Visa and MasterCard have stated they are enforcing the implementation of EMV in the US by October of 2015 and will no longer be liable for card fraud to retailers using the old mag strip technology instead of EMV. As well, both companies are pushing towards PIN security measures instead of the traditional signature security popular in the United States. These measures enacted mean retailers will have to replace their terminals with new EMV terminals before October 1, This implementation bodes well for the POS terminal industry as the typical terminal refresh rate is five years. This insinuates five years of revenue will be pushed into three and a half years. Many of these retailers implementing the new EMV terminals may choose to purchase terminals with other developing technologies, such as those using NFC or customer facing terminals, which could generate higher margins and revenues for the terminals as well as higher future service revenues for the terminal manufacturers. The EMV transition requires the use of updating software more readily, which will provide higher costs going forward but POS terminal providers may be able to pass on some of the costs to their customers. VeriFone has been a part of every major credit card council in the past ten years and has helped develop the current state of the credit card industry. The major credit card and credit service providers have worked together in order to create an efficient international credit industry. Certification by these boards is important for companies. Those who are not certified will surely lose market share to those who have been certified. Competition VeriFone competes with many companies in the POS terminal and services market. These companies include Ingenico, Gemalto, First Data Corp, Heartland Payment Systems, Pax Technology, SZZT Electronics, Equinox Payments, CyberNet and Spire Payments. VeriFone also competes with many industry specific logistics providers such as Gilbarco, IBM, MICROS Systems and NCR Corp. Many small companies with strong regional customer bases compete directly with VeriFone. UOIG 6

7 Competition is not very intense but companies do compete on price, services and security. Other key competitive factors include value added applications, advanced communications and technology, reliability and supply chain flexibility. VeriFone is seen as the industry leader and has significant market share. VeriFone believes the industry will be driven by response to evolving technology, industry certifications and security standards. The industry is consolidating and becoming more vertically integrated as many companies are looking to expand market share inorganically but also trying to diversify their reach and cut costs. For instance, First Data, a leading provider of payment processing services and one of VeriFone s largest customers has begun to develop electronic payment systems in the US market. However, the scope of such dealings is quite small. VeriFone s recent move into more mobile transactions, including services using iphone, ipad and ipod touches puts VeriFone into a different competition space. Some of these alternative competitors include Square and Intuit. However, VeriFone offers a more comprehensive mobile transaction service than such firms as Square and Intuit. Both Square and Intuit have had security issues with this new technology but VeriFone s position as the security leader in the industry will help solidify its position in this alternative payment market. VeriFone may be more expensive than either Square of Intuit, but it does offer better security and a more established service than either of these programs. Even though VeriFone has such large market share, switching costs in the industry are not too high. Any company could switch out its terminal and its service to any other provider with relative ease. However, the level of security and service that VeriFone is able to provide is unmatched by any other competitor. Management and Employee Relations Douglas Bergeron CEO Douglas Bergeron has been CEO of VeriFone since 2001 when he led the divestiture of VeriFone from HP when his private equity firm purchased VeriFone. Mr. Bergeron has since used his technology background to revolutionize the electronic payment industry. Mr. Bergeron holds million shares of VeriFone. Robert Dykes Robert Dykes has been with VeriFone since Prior to joining VeriFone he was CEO of a provider for targeted online advertising networks and has a history working with network infrastructure companies. David Turnbull David Turnbull is the CTO and Senior Vice President of VeriFone. He has been with the firm since Before his time with VeriFone, Mr. Turnbull was an Engineering Director with Apple in the consumer portables division. UOIG 7

8 Management Guidance Management has made many statements in the past where actual performance has surpassed those expectations. We believe management to be accurate in their forecasts and a general guide for long term projections. Currently management believes they can sustain revenue growth in the midteens. This seems reasonable based on the number of emerging market electronic payers that are untapped, the need for EMV terminals and the increasing amount of advertising on EMV terminals. Management believes their service business will become 50% of revenue long term as a result of the rising demand for advertising. Currently, Services make up 25.5% of revenue. Management believes long-term gross margin will be between 42% and 45% with net margin between 14% and 17%. This seems sustainable considering 2011 year end margins were within this band. Recent News VeriFone Reports Results for First Quarter /5/2012 VeriFone stated its acquisition of Point is performing ahead of plan and allowing VeriFone to best implement EMV in the US. The announcement highlighted many of VeriFone s other acquisitions and deals, including LIFT Retail Marketing and GlobalBay Mobile POS and Retailing solutions. Management updated guidance for Business Wire VeriFone Systems to Acquire Point 11/14/2011 VeriFone purchase Point for EUR600 million in order to expand its alternative payment infrastructure in the US. With the mandate by both Visa and MasterCard to use EMV technology in the US, VeriFone believed it could best implement by acquiring a company that deftly transitioned in Europe. The acquisition closed by the end of Reuters Security Breach Hits US Card Processors, Banks 3/30/2012 Global Payments, a small credit card processor (3.5% market share) reported being hacked. This hack did not directly affect VeriFone but does hurt the reputation of the industry. As a result of the hack credit service equities were down roughly 1% across the board. Many speculate the extent of the information hacked was small but is unknown at this point. Reuters Catalysts Upside Emerging market payment change to electronic payments Positive job market data will lead to increasing consumer sentiment and more sales UOIG 8

9 Strong earnings from the major credit card companies Increasing spending will lead to more service charges and higher revenue Downside Negative news about consumer sentiment or retailers Loss of market share in emerging markets, especially China Volatile currency markets Potential overpayment on acquisitions Comparable Analysis Ingenico 25% Ingenico SA (Compagnie Industrielle et Financiere d'ingenierie) is a Francebased producer of financial transaction systems. The Company provides a range of secure transaction solutions, including hardware, software and services, for payments at points of sale, over the Internet, or by mobile telephone. The Company's solutions are organized around the following: payment terminals and software; terminal estate management, including security application updates; connectivity ensuring the terminal-to-bank host connection, after-sales service, including installation, maintenance and repair to upgrades; centralization of transactions (Axis); end-to-end security, from terminal to bank or processor; and value-added services, including prepaid mobile phone transfers and top-ups, loyalty card processing, private-label card management and other services including dynamic currency conversion. Google Finance Gemalto 25% Gemalto N.V. provides digital security products and services worldwide. It develops software applications through the design and production of secure personal devices, such as smart cards, subscriber identification modules (SIMs), e-passports, and tokens, as well as deploys managed services... Its products and services for the financial services and retail sector comprise EMV cards and Eco cards; contactless payment, instant issuance, and central issuance; and personalization, packaging, Web, e-banking, and cards customization services. Yahoo Finance Micros Systems 25% Micros Systems is a provider of enterprise planning solutions and IT consulting services to the restaurant, hotel, and entertainment industries. The company makes point-of-sale terminals, central reservation systems, and other hardware and management software systems that allow management to control inventories and analyze product demand. Its customers include Hilton Hotels, Marriot International, La Madeline, and MGM Mirage. Morningstar NCR Corporation 25% NCR designs and services automated systems that streamline interactions between businesses and consumers. The company is the largest global vendor of ATMs and also sells point-of-sale terminals and self-service check-out systems for retail stores, and self-check-in kiosks for airlines and hotels. The firm derives UOIG 9

10 the majority of its revenue from overseas. Morningstar Discounted Cash Flow Analysis Revenue Model Total revenue is projected by forecasting the systems solutions and services segments. These segments are projected using growth rates for International and North American sales. The Systems Solutions segment currently makes up the majority of VeriFone s revenue. Within the Systems Solutions segment, international sales accounts for the majority of revenue and has historically grown the fastest. These high growth rates are projected to continue due to the limited market penetration of POS terminals in many emerging markets such as China, India and Brazil. International systems growth is projected to outpace the growth in North America and increase as a percentage of total sales. In North America, we expect systems solutions revenues to surprise to the upside. This upside will be driven by an accelerated replacement cycle due to a shift in fraud liability from US banks to retailers not employing EMV payment terminals. This change should pull forward terminal sales in the North American market. Customers such as 711 and Plaid Pantry will need to purchase new, higher margin, EMV enabled terminals in order to defer potential fraud liabilities back to the banks. By some estimates, this liability shift could increase VeriFone s addressable market by 50% by The integration of EMV systems into the product mix should be improved by the acquisition of Point. Point s management has experience with the EMV rollout, having already gone through the process in Europe. This experience should help to ease the integration process, creating cost synergies and increasing cross selling opportunities. Services revenue is projected to grow rapidly, outpacing growth in systems and increasing as a percentage of total sales. The main driver of this high double digit growth is advertising, specifically in taxis and fixed location POS terminals such as gas stations and convenience stores. Show Media has the potential to expand domestically and internationally and is one of the most exciting prospects for the company. As VeriFone releases more advanced POS terminals they should see advertising revenue accelerate. This is because newer POS terminal models are equipped with the ability to display graphics, allowing for the cross selling of services. Additionally, the acquisition of Lift and should drive services growth as operations are expanded in North America and ultimately internationally. The acquisition of Global Bay gives VeriFone exposure to the mobile point of sale market. Global Bay sells smartphone accessories and applications that allow a mobile device to process payments, manage inventory and other retail services. These products and services target small business owners and are in competition with Sqaure Inc, a privately owned mobile POS provider. Mobile POS is one of the fastest growing markets in the industry and the acquisition UOIG 10

11 places VeriFone in an excellent position to maintain their strong market position as it shift towards mobile. Management has set the goal of receiving 50% of their revenue from the higher margin services segment by They believe VeriFone can reach $1.5 billion in services sales by 2015, implying total revenue of $3.0 billion. We have forecasted that the systems solutions segment surprises significantly to the upside, and thus the services segment will fall short of this 50% target. Overall revenue is projected to outstrip company guidance due to the strength of the underlying transition in payment methods in the international segment and the switch to EMV in the North American market. Gross Margin Gross Margin is projected to increase as VeriFone transitions to a more services oriented business. Growth in advertising revenue will be the driving force behind this margin expansion with the rollout of EMV terminals boosting systems margins as well. Operating Expenses Research & Development expenses are projected to increase nominally over the next several years, although they decline as a percentage of revenue. R&D expense declines a percentage of revenue in the near term because the need to develop new products and software has diminished in light of the intellectual property acquired in the past two years. R&D spending is projected to pick substantially in nominal terms as the product cycle resets and the industry transitions into a new product rollout. General Administrative expenses are projected to decline as a percentage of revenue as VeriFone benefits from increase economies of scale. Sales and marketing expenses are projected to increase nominally, although they will decline as a percentage of revenue. This is partially due to the synergies gained from cross selling products and services from acquired businesses. Depreciation & Amortization Depreciation was projected using a straight line schedule for Property, Plant & Equipment. For Intangible assets, company guidance was used. The spike in Amortization is due to the recent acquisitions; however the company has traditionally expanded through acquisitions and will likely continue to acquire intellectual property in this fashion. Tax Rate The future tax rate was determined by summing up the pretax earnings from 2012 to 2016, applying the 35% statutory rate to these earnings, and then applying all of the company s deferred tax assets. The tax rate after these benefits were applied was used from 2012 to In the terminal year and terminal value calculation, the statutory rate of 35% was used. Another approach we considered was to frontload the use of deferred tax assets. The issue with this method is that the timing and amount of benefits used creates more uncertainty and greater volatility in cash flows. For these reasons we determined that normalization of the tax rate over the life of the DCF was the UOIG 11

12 EV/EBITDA Multiple Weight LTM 13.22x 40% 2011 A 13.41x 30% 2012 E 10.96x 20% 2013 E 9.64x 10% Weighted Average Multiple 12.47x best approach despite the fact it may understate net income in the next two years. Exit Multiple To determine an exit multiple, actual EBITDA results from the last twelve months (LTM) and 2011 were used to calculate an EV/EBITDA for all comparable companies. To account for future growth, consensus estimates of EBITDA for 2012 and 2013 were used to get a forward EV/EBITDA multiple. A weighted average of these four metrics was taken and applied to the terminal EBITDA of VeriFone. This value was then discounted to present value using the company s WACC, yielding the discounted terminal value. The present value of the sum of free cash flows was added to the discounted terminal value to yield the implied enterprise value. Debt was subtracted to reach the implied equity value. Implied equity value was divided by the diluted share count to reach an implied to price. Because the exit multiple used in this valuation is a weighted average of the comparable companies, who s growth expectations is lower than VeriFone s, it is likely that the multiple may be understated. If a 5 year historical LTM EV/EBITDA multiple of VeriFone is taken, it yields a much higher multiple and implied price. For this reason, we believe that there is considerable upside if VeriFone maintains current growth rates and limited downside if growth decreases to that of its competitors. Recommendation Valuation Implied Price Wieght Comps $ % DCF $ % Exit Multiple $ % Target Price $77.21 Current Share Price $51.42 Undervalued 50.2% We are recommending a buy for all portfolios for VeriFone. VeriFone s rapid expansion from acquisitions, the stipulation by the major US credit card companies to move to EMV and the rise of credit and debit cards in emerging markets will drive VeriFone revenue in the coming years. New EMV terminals will grow the company s higher margin service segment by deriving an increasing amount of revenues from ads. We believe VeriFone is well positioned in the POS market and as a result has explosive growth prospects. Because of an implied undervaluation of 50% we are recommending a buy for DADCO, Svigals and the Tall Firs portfolios. UOIG 12

13 Appendix 1 Comparables Analysis Comparables Analysis PAY ING (France) NCR MCRS GTO (France) ($ in Thousands) VeriFone Ingenico NCR Corp Micros Systems Gemalto Stock Characteristics Max Min Weight Avg. Median 25% 10% 40% 25% Current Price $66.78 $21.60 $52.39 $50.79 $51.42 $47.34 $21.60 $54.24 $66.78 Size Short-Term Debt 53,191-14,796 10,478 53,191 38,827 1,000-19,957 Long-Term Debt 1,313, , ,330 1,313, , ,000-7,535 Cash and Cash Equivalent 739, , , , , , , , ,062 Non-Controlling Interest 38,659 5,525 9,718 7,661 38,659 9,279 36,000 6,042 5,525 Preferred Stock Diluted Basic Shares 161,000 51,973 83,068 83, ,954 51, ,000 79,928 88,016 Market Capitalization 5,910,936 2,460,336 4,166,473 3,906,435 5,910,936 2,460,336 3,477,600 4,335,270 5,878,082 Enterprise Value 6,650,029 2,604,036 3,855,601 3,785,204 6,650,029 2,604,036 3,968,600 3,601,807 5,468,037 Profitability Margins EBIT Margin 23.2% 8.3% 17.1% 14.0% 18.2% 15.3% 8.3% 23.2% 12.7% EBITDA Margin 24.9% 12.4% 19.8% 17.1% 24.7% 18.4% 12.4% 24.9% 15.9% Net Margin 15.8% 4.6% 11.8% 10.0% 12.7% 8.9% 4.6% 15.8% 11.0% Credit Metrics Debt/EV 23.0% 0.0% 8.0% 11.0% 20.5% 23.0% 21.5% 0.0% 0.5% Leverage Ratio 227.4% 0.0% 64.0% 58.2% 227.4% 206.0% 110.9% 0.0% 5.6% 2013 Estimates Revenue 6,182,900 1,213,000 2,268,062 2,329,144 2,433,054 1,579,179 6,182,900 1,213,000 3,079,110 Gross Profit 1,483, , , ,596 1,114, ,796 1,483, ,700 1,209,492 EBIT 514, , , , , , , , ,310 EBITDA 769, , , , , , , , ,995 Net Income 338, , , , , , , , ,956 Valuation EV/Revenue 2.97x 0.64x 2.11x 1.71x 2.73x 1.65x 0.64x 2.97x 1.78x EV/Gross Profit 5.96x 2.67x 4.49x 4.21x 5.96x 3.91x 2.67x 5.30x 4.52x EV/EBIT 15.04x 7.72x 12.06x 11.78x 15.04x 10.78x 7.72x 12.78x 13.94x EV/EBITDA 11.93x 5.16x 10.32x 10.06x 11.07x 8.97x 5.16x 11.93x 11.16x EV/Net Income 21.50x 13.88x 17.57x 17.29x 21.50x 18.46x 13.88x 18.83x 16.13x Multiple Implied Price Weight EV/Revenue $ % EV/Gross Profit $ % EV/EBIT $ % EV/EBITDA $ % EV/Net Income $ % Price Target $ Current Price Overvalued (19.11%) UOIG 13

14 Appendix 2 Discounted Cash Flows Analysis Discounted Cash Flow Analysis Q1 A Q2-3-4 E ($ in Thousands) 2008A 2009A 2010A 2011A 2012E 2013E 2014E 2015E 2016E 2017E Total Revenue 921, ,714 1,001,537 1,303, ,524 1,517,500 1,937,024 2,433,054 3,053,892 3,611,997 4,211,068 4,854,660 % YoY Growth -8.4% 18.6% 30.2% 47.8% 375.4% 48.6% 25.6% 25.5% 18.3% 16.6% 15.3% Cost of Goods Sold 580, , , , , ,828 1,058,470 1,289,519 1,610,928 1,896,298 2,200,283 2,524,423 % Revenue 63.0% 61.7% 59.8% 59.7% 58.3% 53.00% 54.64% 53.00% 52.75% 52.50% 52.25% 52.00% Gross Profit 341, , , , , , ,555 1,143,535 1,442,964 1,715,698 2,010,785 2,330,237 Gross Margin 37.0% 38.3% 40.2% 40.3% 41.7% 46.4% 45.4% 47.0% 47.3% 47.5% 47.8% 48.0% R&D 75,622 65,148 74, ,155 35, , , , , , , ,280 % Revenue 8.2% 7.7% 7.4% 8.4% 8.4% 7.4% 7.6% 6.4% 6.0% 6.0% 6.0% 6.0% Sales & Marketing 91,457 73,544 94, ,267 39, , , , , , , ,280 % Revenue 9.9% 8.7% 9.5% 10.6% 9.5% 7.50% 7.9% 7.7% 7.5% 6.5% 6.3% 6.0% General Administrative 126,625 76,468 84, ,789 46, , , , , , , ,826 % Revenue 13.7% 9.1% 8.4% 9.5% 11.0% 8.00% 8.8% 8.2% 7.5% 7.0% 7.0% 7.0% Depreciation and Amortization 74,273 61,503 46,602 48,318 31, , , , , , , ,158 % Revenue 8.1% 7.3% 4.7% 3.7% 7.6% 7.09% 6.52% 5.44% 4.84% 3.65% 3.20% Earnings Before Interest & Taxes (315,825) (128,966) 102, ,710 21, , , , , ,669 1,046,580 1,252,693 % Revenue -34.3% -15.3% 10.2% 8.1% 5.2% 16.3% 13.9% 18.2% 20.8% 23.2% 24.9% 25.8% Interest Expense 42,209 26,476 28,344 28,950 14,634 42,300 56,934 41, % Revenue 4.58% 3.13% 2.83% 2.22% 3.49% 2.79% 2.94% 1.70% 0.00% 0.00% 0.00% 0.00% Net Interest (Income) (5,981) (1,517) (1,278) (2,595) (1,007) (2,867) (3,874) (4,866) % Revenue (.65%) (.18%) (.13%) (.20%) (.20%) (.20%) 0.00% 0.00% 0.00% 0.00% Other Operating Expense (Income) 13,181 (5,716) (2,887) (11,637) 21,198 2,046 23,244 (12,165) % Revenue 1.43% (.68%) (.29%) (.89%) 1.20% (.50%) 0.00% 0.00% 0.00% 0.00% Earnings Before Taxes (365,234) (148,209) 78,245 90,992 (12,905) 206, , , , ,669 1,046,580 1,252,693 % Revenue -39.6% -17.5% 7.8% 7.0% -3.1% 10.0% 17.2% 20.8% 23.2% 24.9% 25.8% Normailized Taxes (Benefits) (127,832) (51,873) 27,386 31,852 (4,517) 72,174 67, , , , , ,443 Tax Rate 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% Less Taxes (Benefits) 45,838 9,246 (20,582) (191,412) (9,782) 60,042 50, , , , , ,443 Tax Rate 26.00% 26.00% 26.00% 26.00% 26.00% 35.00% Net Income (411,072) (157,455) 98, ,404 (3,123) 146, , , , , , ,251 Net Margin -44.6% -18.6% 9.9% 21.7% -0.7% 9.6% 7.4% 12.7% 15.4% 17.1% 18.4% 16.8% Add Back: Depreciation and Amortization 74,273 61,503 46,602 48,318 31, , , , , , , ,158 Add Back: Interest Expense*(1-Tax Rate) 42,209 26,476 28,344 28,950 14,634 27,497 42,131 30, Operating Cash Flow (294,590) (69,476) 173, ,672 43, , , , , , , ,409 % Revenue -32.0% -8.2% 17.4% 27.6% 10.3% 18.4% 16.7% 20.5% 20.8% 22.0% 22.0% 20.0% Current Assets 405, , , , , , , ,760 1,132,007 1,327,718 1,450,546 % Revenue 44.00% 35.25% 31.55% 43.40% 0.00% 41.58% 32.57% 31.96% 31.53% 31.34% 31.53% 29.88% Current Liabilities 261, , , , , , , , , ,334 1,087,377 % Revenue 28.37% 28.41% 25.41% 53.55% 0.00% 33.22% 26.03% 25.24% 24.77% 23.31% 22.97% 22.40% Net Working Capital 144,178 57,832 61,428 (132,320) - 126, , , , , , ,168 % Revenue 15.6% 6.8% 6.1% -10.1% 0.0% 8.4% 6.5% 6.7% 6.8% 8.0% 8.6% 7.5% Change in Working Capital (152,637) , ,121 36,713 42,655 83,956 70,258 2,785 Capital Expenditures 22,051 12,054 11,578 14,811 7,289 22,800 30,089 30,413 42,754 54,180 73,694 97,093 % Revenue 2.4% 1.4% 1.2% 1.1% 1.7% 1.5% 1.6% 1.3% 1.4% 1.5% 1.8% 2.0% Acquisitions 15,753 1,330 10,136 49,231 1,067,517 2,500 1,070,017 24,331 30,539 18,060 21,055 72,820 % Revenue 1.7% 0.2% 1.0% 3.8% 254.5% 0.2% 55.2% 1.0% 1.0% 0.5% 0.5% 1.5% Unlevered Free Cash Flow (179,757) 3, , ,378 (1,031,436) (5,237) (1,036,673) 407, , , , ,711 Discounted Free Cash Flow (4,887.5) 346, , , , ,890.3 EBITDA (241,552) (67,463) 149, ,028 53, , , , ,647 1,011,359 1,200,154 1,407,851 EBITDA Margin -26.2% -8.0% 14.9% 11.8% 12.8% 23.3% 21.0% 24.7% 26.3% 28.0% 28.5% 29.0% UOIG 14

15 Appendix 3 Revenue Model Revenue Model ($ in Thousands) 2008A 2009A 2010A 2011A 2012E 2013E 2014E 2015E 2016E 2017E International 439, , ,193 1,131,640 1,301,386 1,496,594 1,646,253 1,810,879 1,991,966 % Change 11.4% 43.4% 61.4% 15.0% 15.0% 10.0% 10.0% 10.0% % of System Solutions 60.3% 59.0% 67.8% 78.2% 79.9% 81.2% 81.2% 81.9% 82.6% North America 288, , , , , , , , ,772 % Change 17.8% -1.3% -5.5% 3.0% 6.0% 10.0% 5.0% 5.0% % of System Solutions 39.7% 41.0% 32.4% 21.9% 20.1% 18.8% 18.8% 18.1% 17.4% Total System Solutions 807, , ,949 1,033,911 1,446,641 1,627,926 1,842,726 2,026,999 2,210,661 2,411,738 % Growth 1.9% -9.9% 13.9% 24.7% 39.9% 12.5% 13.2% 10.0% 9.1% 9.1% % of Total 87.6% 86.1% 82.8% 79.3% 74.7% 66.9% 60.3% 56.1% 52.5% 49.7% North America 54, , , , , , , , ,282 % Growth 84.6% 49.4% 35.9% 25.0% 30.0% 20.0% 15.0% 12.5% % of Services 46.8% 58.6% 56.0% 41.9% 31.9% 27.6% 25.3% 23.0% 21.2% International 62,635 71, , , , ,329 1,184,394 1,539,712 1,924,640 % Growth 14.5% 69.6% 137.3% 90.0% 60.0% 35.0% 30.0% 25.0% % of Services 53.5% 41.5% 45.0% 58.9% 68.1% 72.4% 74.7% 77.0% 78.8% Total Services 114, , , , , ,128 1,211,166 1,584,998 2,000,407 2,442,922 % Growth 3.5% 2.3% 47.4% 56.4% 81.7% 64.2% 50.4% 30.9% 26.2% 22.1% % of Total 12.4% 13.9% 17.2% 20.7% 25.3% 33.1% 39.7% 43.9% 47.5% 50.3% Total Revenue 921, ,714 1,001,537 1,303,866 1,937,024 2,433,054 3,053,892 3,611,997 4,211,068 4,854,660 % Growth 2.1% (8.4%) 18.6% 30.2% 48.6% 25.6% 25.5% 18.3% 16.6% 15.3% Appendix 4 Discounted Cash Flows Analysis Assumptions Discounte d Fre e Cash Flow Assumptions Tax Rate 35.00% Terminal Growth Rate 3.50% Risk Free Rate 1.97% Terminal Value 13,390,869 Beta 1.37 PV of Terminal Value 7,880,963 Market Risk Premium 7.00% Sum of PV Free Cash Flows 2,158,066 % Equity 79.45% Firm Value 10,039,029 % Debt 20.55% Total Debt 1,366,366 Cost of Debt 3.67% Cash & Cash Equivalents 665,932 CAPM 11.54% Market Capitalization 8,672,663 WACC 9.66% Fully Diluted Shares 114,954 Implied Price $75.44 Current Price $51.42 Unde rvalue d 46.7% Perpetual Growth Rate Implied Price Discount Rate % 3.0% 3.5% 4.0% 4.5% UOIG 15

16 Appendix 5 Exit Multiple Exit Multiple Terminal Year EBITDA $1,407,851 Exit Multiple 12.5x Terminal Value $17,551,161 Discount Period 5.75 Discount Factor (@ WACC of 9.66%) 58.9% Discounted Terminal Value $10,329,431 PV of FCF $2,162,953 Enterprise Value $12,492,384 Less: Debt ($1,366,366) Equity Value $11,126,018 Diluted Shares Outstanding 114,954 Implied Share Price $96.79 Current Share Price $51.42 Undervalued 88.2% Adjusted Beta Implied Price EBITDA Exit Multiple Appendix 6 Sources SEC Filings (10-K, 10-Q) VeriFone Investor Relations VeriFone Earnings call transcripts IBIS World S&P Net Advantage Factset Bloomberg Cnet Dailydooh Bloomberg Yahoo Finance UOIG 16