VeriFone Says Security Driving Technology Sales

VeriFone Systems Inc. said merchants' security concerns are driving development and sales of new payment hardware.

Gas station owners, taxicab company owners and retailers have expressed interest in using encryption to protect payments, VeriFone said. To that end, First Data Corp. has said it would offer the San Jose, Calif., terminal maker's VeriShield Protect service to customers unless they opt out. VeriFone also said it plans to follow a similar approach in Europe once its deal to buy Hypercom Corp. closes. VeriFone said in November that it agreed to purchase the terminal maker in a stock deal to improve its business overseas.

"These guys are growing very fast right now," said Wedbush Securities analyst Gil B. Luria. "They have a lot of things going well … end-to-end encryption software to retailers, new petroleum products to gas stations and taxi products and services — those three things are helping them grow above and beyond."

VeriFone's profit rose 202%, to $32 million, in its first quarter, which ended Jan. 31, from a year earlier. Net revenue rose 27%, to $284 million.

VeriFone estimated that about a quarter of its petroleum customers have signed up for a new software maintenance program. It said it will deploy about 25,000 secure pump devices this year, about three times more than were sold last year.

VeriFone's gas-pump line has the potential to generate $200 million to $300 million in revenue over the next several years, said Tien-tsin Huang, a JPMorgan Chase & Co. analyst who covers the payments networks.

Sales of VeriFone's payment acceptance hardware for taxis are also growing. So far, VeriFone has installed about 1,000 card readers in London taxis in anticipation of the Olympics there next summer.

"London has twice the number of taxis than NYC, and average fares are slightly higher," Huang wrote in a research note to investors Wednesday. That "bodes well for VeriFone's opportunity to earn higher yields."

Douglas G. Bergeron, VeriFone's chief executive, said the company's pending acquisition of Hypercom will bolster its presence in Europe.

"Once we get the Hypercom deal into the fold, we are going to start moving in a much more aggressive manner," he said on a conference call with analysts Tuesday. "The transformational initiatives that we've been so successful incubating over the last two years in the U.S.," including new software and encryption will be taken "aggressively into Europe."

Bergeron also said mobile payments initiatives, such as those being pushed by Isis (the network built by several telecommunications companies), Google Inc. and Apple Inc., will inevitably involve VeriFone because all of those companies will need to guarantee that their payments will work at the point of sale.

"Consumers need the confidence that their phone can be used nearly everywhere to force a sustainable change in buying behavior," Bergeron said. "Mobile commerce must be integrated with other forms of payment and existing payment systems that are certified by major processors and installed in the vast majority of retailers."

Bergeron also made an argument for the U.S. to switch to credit and debit cards with the EMV Integrated Circuit Card Specifications, commonly called "chip and PIN" because consumers typically use a PIN to verify transactions made with EMV cards. VeriFone would benefit from any change that would cause merchants to upgrade their point of sale terminals.

"We absolutely do think that the U.S. does best to align itself with chip and PIN countries," Bergeron said. "A lot of the hacking that occurs in Europe of credit card numbers ends up … producing mag-stripe variants of European chip cards for use only in American retailers. So a lot of the fraud is being exported to America."

The U.S. has been slow to switch to EMV. The first U.S. company to issue EMV cards to domestic customers, United Nations Federal Credit Union in New York, only began offering the cards last year. The third, State Employees' Credit Union in Raleigh, N.C., only announced its plans last month. Travelex Currency Services Inc. was the second company to issue EMV cards to U.S. residents.

And Visa Inc. excluded U.S. merchants from a policy it announced last month to waive its requirement that merchants annually validate compliance with the Payment Card Industry Data Security Standard if 75% of the transactions they accept are made with EMV cards.

Still, some analysts say the U.S. will widely switch to EMV. In a report published in December, Aite Group LLC of Boston forecast that most U.S. consumers would be issued EMV cards in the next several years.

"Security must be ironclad" at the point of sale and on mobile devices, Bergeron said.