As Mobile Payment Takes Off, Who Will Cash In?

In This Report Mobile payments are gaining significant traction and are estimated to grow a staggering 600% in the U.S. by 2017. With Asia already ahead on adoption, a fragmented landscape of players, and no clear winner in sight, now is the time to understand the predominant technologies behind digital payments and the key companies to watch. As Mobile Payment Takes Off, Who Will Cash In? Part of our work as O Neil Equity Research analysts is to stay on top of companies taking part in an emerging trend that will change how society functions. Right now, mobile payments are growing in popularity, meaning a broad shift to digital payment has begun. This Special Report provides an overview of the types of technology in play and the major stocks we are watching many of which are already benefitting. Enormous growth expected from now to 2017 In 2012, only 10% of U.S. consumers used mobile payment systems, yet they made $12.84 billion in such payments, a figure that is projected to grow to $90.05 billion, by 600%, by 2017. Globally, 2012 mobile payment transaction values were $163.1 billion, made by 200.8 million users. Between 2012 and 2017, worldwide mobile transaction volume and value is expected to have annual growth of 35%, soaring 342% by 2017 to $721 billion in payments made by 450 million users. Some major retailers are preparing for this growth by joining forces. In 2012, a group of about 14 major brand retailers, including Wal- Mart, Target, 7-Eleven, CVS, and Shell created a mobile payment network called the Merchant Customer Exchange (MCX) that lets Page 1

their customers pay via their phones; membership in the MCX has now grown to 46 merchants. Mobile carriers see an opportunity as well. Teaming up through a joint venture, ISIS, AT&T, Verizon, and T- Mobile are testing mobile payment for their customers using nearfield communications (NFC) technology. The mobile payment landscape Mobile payment today falls into one of three categories: (1) mobile banking, a standard service at major banks that allows customers to perform banking activities, such as making deposits and paying bills using a mobile device; (2) mobile remote, in which customers purchase goods or services remotely via an internet browser on a mobile device; and (3) mobile local, in which customers make an in-store purchase using one of two competing approaches: contactless and POS. Contactless mobile uses near-field communication (NFC) to turn consumers smart phones into mobile wallets. NFC-enabled smart phones work like credit cards, but instead of swiping, consumers tap or wave their phone at a payment terminal. The technology has the backing of Visa and Samsung, who signed a global alliance agreement early this year. It is also supported by Google via Google Wallet. NFC terminals appeal to major retailers because they integrate easier with legacy systems, making it less costly to convert. Ship- Mobile-powered transactions Mobile Banking Mobile Remote Payments Mobile Local Payments Performing banking activities with a mobile phone Examples: Receiving balance update via SMS Bill payment processing Paying with a mobile phone when the payee is remote to the mobile user Example: Buying goods via Internet with a mobile phone Contactless mobile payment NFC App-based payments Example: Mobile wallets Mobile point-ofsale systems Payment systems that enable accepting payments with a mobile phone Example: Plug-in card-reader or app-based payment systems Source: Business Insider Page 2

ments of NFC equipped handsets, as of 2012, stood at 140 million units, and it is expected to surpass the one billion mark by 2017. The main disadvantage of NFC is that it works for only a subset of smart phones. Apple, for example, has yet to endorse NFC in its devices, and although Apple has lost some market share to Samsung and other Android-based phones, the iphone remains at the top of the U.S. smart phone market, with 39% share of smart phone subscribers. One type of POS (point of sale) requires merchants to use a separate plug-in device attached to a mobile device equipped with a special application that reads credit cards. Credit cards are then swiped into the plug-in device, just like at a traditional register, but the merchant uses a smart phone or tablet (there is no register) to complete the customer s purchase. Square, a private company, and Ebay s Paypal are among the many companies offering this technology. Another type of POS, used by MCX and retailers such as Starbucks, allows payment via an app-based system. In the U.S., POS makes the most sense for start-ups, neighborhood cafés, food trucks, and corner restaurants, because it is more practical and requires a much lower investment: all that s needed is a mobile device, app, and a plug-in reader. Most POS providers offer the plug-in readers for free in exchange for comparable service fees. There is huge untapped demand for POS services. More than 27 million small and local merchants do not accept credit cards, which is increasingly the favored payment transaction by customers. Source: Square Who will introduce the next innovation in mobile payments? With 85 million users, Asia had the greatest number of mobile payment users in the world in 2012. China and South Korea led the region, with rates of 20% and 15%, respectively, compared to the U.S which stood only at 3% in 2012. The strong adoption in China stems from state-run wireless carriers and major banks working together to make mobile payment more acceptable. In Korea, NFC comes standard in most smart phones and is widely accepted for many uses besides mobile payment, including capture of information at bus stops via NFC-enabled smart posters. Given its advanced state of mobile payment, the newest innovation in the mobile payment space could very well come out of Asia. Another possibility would be an emerging country, where mobile phones are already taking the place of lacking infrastruc- Page 3

ture. In developed countries, legacy systems hamper wider mobile payment adoption, as do issues like heavy regulation, the aftereffects of the banking crisis, and a highly fragmented payments landscape. The companies we are watching within this theme As of 8/6/2013 Gemalto Vantiv Wirecard Symbol (Bloomberg symbol) Operations summary Price performance (YTD) GTO.NL (GTO NA) Smart cards VNTV That fragmented landscape is a big part of the reason there has been no breakout winner in this investment theme yet. There are 25+ companies in just the mobile local space alone, making the market extremely crowded not an unusual situation for a still-nascent investment theme. In addition to the split of effort and energy between NFC and POS, there are concerns about security that must be dealt with before mass adoption can flourish. In the end, an open payment platform may still be adopted, one that supports all payment types, leaving consumers to choose the payment method that best fits their needs. Under that scenario, the benefitting companies could be more diverse and the outperformance of a particular player less pronounced. We shall see. From our historical studies at O Neil, it s clear that as a theme runs its course, leadership presents itself early with certain common fundamental features, such year-over-year earnings and sales growth, as well as growing ROE, cash flow per share, and pretax margins. The companies across related industries that stand out in the current environment and that we are tracking in our PANA- RAY investment theme list include: Gemalto (GTO.NL, GTO NA) This Netherlands-based company provides smart chips for EMV Europay, Mastercard, and Visa for credit and debit card payments. Processing WDIX.DE (WDI GR) POS terminals 20% 37% 24% P/E 34 15 35 Market cap (US$) $9.5 bil $3.9 bil $3.4 bil Shares outstanding 88 mil 142 mil 112 mil 2012 annual sales (US$) 3-year revenue 3-year earnings 2012 pretax margin $2.9 bil $1.9 bil $522 mil 12% 26% 20% 21% 114% 12% 10% 22% 23% 2012 ROE 11% 36% 17% EPS rank 92 89 72 Relative Strength Rating 88 77 81 A/D Rating B B- B+ GTO.NL Breaks out of consolidation Above average volume moving into break out Source: PANARAY Page 4

Vantiv, Inc. (VNTV) This provider of payment processing services more than 200,000 small- to mid-sized businesses and more than 1,350 financial institutions, including nine of the top 50 financial institutions in the U.S. VNTV Breaks out of consolidation As of 8/6/2013 Visa Mastercard NXP Semiconductors Source: PANARAY Heavy volume near break out Wirecard AG (WDIX.DE, WDI GR) This Germany-based company offers hosted POS Terminal/Card reader hardware, NFC platforms, and other technologies. It is a principal member of Visa and Mastercard, as well as Asian credit card organizations. WDIX.DE Breaks out of consolidation Finds support at 40-week moving average Above-average volume on break out Symbol V MA NXPI Operations summary Price Performance (YTD) Payment solutions Payment solutions NFC provider 21% 33% 34% P/E 26 27 14 Market cap (US$) $94.1 bil $75.9 bil $8.7 bil Shares outstanding 515 mil 116 mil 250 mil 2012 annual sales (US$) 3-year revenue 3-year earnings 2012 pretax margin $10.4 bil $7.4 bil $4.4 bil 14% 15% 0% 25% 25% NA 61% 53% 13% 2012 ROE 16% 43% 44% EPS rank 96 95 74 Relative Strength Rating 67 80 83 A/D Rating C+ B+ C Source: PANARAY Visa (V) and Mastercard (MA) These leaders in global payment solutions have a hand in almost every credit and debit card transaction that occurs worldwide. NXP Semiconductors (NXPI) This Netherlands-based fables chip designer is the co-founder of NFC and has the majority share of the global contactless market. Ingenico (INGE.FR, ING FP) This French Company provides electronic payment terminals and transaction services to many companies, including Visa. Page 5

Kona International (KBB.KR, 052400 KS) This Korean provider of smart card solutions is among the largest providers of government ID solutions and bank cards in the world. XOOM Corp (XOOM) This company provides online consumerto-consumer international money transfer services in 30 countries. Money transfers are initiated online or through a mobile device and can be sent at any time from any internet-enabled location. As of 8/6/2013 Ingenico Kona Xoom SOURCES: 1. Frederic Lardinois, Forrester: 84% of U.S. Adults Now Use The Web Daily, 50% Own Smartphones, Tablet Ownership Doubled To 19% in 2012, TechCrunch, December 19, 2012. 2. Bill Siwicki, Consumers make $12.84 billion in mobile payments in 2012. Internet retailer, January 16, 2013 3. Asia Pacific mobile payment transaction value to grow 38%, Digital News Asia, June 14, 2013 4. Jennifer Van Grove, Top retailers band to form MCX, a potential dark horse in mobile payments, Venturebeat, August 15, 2012. 5. Devindra Hardawar, Isis confirms Oct. 22 launch bringing mobile payments to Austin, Salt Lake City, Venturebeat, October 17, 2012. 6. Who Will Win As Mobile Payments Go Mainstream, Business Insider, February 13, 2013. 7. Visa and Samsung Sign Global Alliance Agreement to Accelerate Mobile (NFC) Payments, Visa press release, Feb 25, 2013. 8. Shipments of NFC-enabled handsets grew 300 percent in 2012, Berg Insight, June 17, 2013. 9. Natasha Lomas, NFC Stands For Nobody F****** Cares And Apple Gets That, TechCrunch, June 12, 2013 10. comscore Reports May 2013 U.S. Smartphone Subscriber Market Share, com Score, June 28, 2013 11. The Payments Innovation Jury Report 2013, Ixaris Symbol (Bloomberg symbol) Operations summary Price performance (YTD) INGE.FR (ING FP) POS terminals KBB.KR (052400 KS) Smart cards XOOM Intl. money transfer 33% 74% 24% P/E 31 17 660 Market cap (US$) $4.03 bil $363 mil $1.05 bil Shares outstanding 53 mil 11 mil 33 mil 2012 annual sales (US$) 3-year revenue 3-year earnings 2012 pretax margin $1.6 bil $129 mil $80 mil 18% 29% 54% 44% 29% NA 12% 16% NA 2012 ROE 15% 19% NA EPS rank 98 83 79 Relative Strength Rating 82 96 87 A/D Rating A+ C A- William O Neil + Company, Incorporated Offers the world s leading institutional investment managers a distinct blend of quantitative, fundamental, and technical expertise in global stock buyand-sell recommendations. Its core method profiles stocks displaying the characteristics of outperformance proven persistent over market history drawn from the firm s industry-leading database. William O Neil + Co., Incorporated is a Registered Investment Advisor with the State of California and certain other states. The firm and its affiliates may now or in the future have positions in the securities mentioned in this or other publications. Charts are intended to be used as tools to assist institutional investors in identifying equity ideas worthy for further review. Charts provide certain current and historical information, but are not a substitute for comprehensive analysis of the individual stocks. For further information about our business and legal policies, please see williamoneil.com/legal. Page 6