Pooling Resources

  Smaller North American payment terminal vendors are turning to their global counterparts to seek ways to compete against bigger market players. Will these companies find that two heads can work better than one?
  With the North American payment terminal market now controlled primarily by four major players-VeriFone, Hypercom, Ingenico and Lipman-some of the region's smaller competitors are struggling. In some cases, these smaller firms are collaborating with terminal companies from other regions to share expertise in an attempt to create better operational systems and products.
  France-based Thales e-Transactions Inc., for example, in January signed a memorandum of understanding for future cooperation with Keycorp, an Australian payment terminal company. And Toronto, Canada-based NBS Technologies Inc. has formed a similar relationship with Sagem Monetel, a France-based terminal maker.
  Such alliances tend to indicate smaller firms have identified substantial obstacles that they cannot overcome alone, observers say.
  "It's a tough market for all of the terminal guys, but especially the smaller ones," says David W. Lott, a director at Collective Dynamics, an Atlanta-based consultancy. "They are fighting and scratching for everything they do."
  And, Lott believes, forming alliances with similar companies from other markets could help smaller firms to remain competitive. "They need to find a partner so each can concentrate on their expertise or core competency and hopefully survive."
  Indeed, the agreement between Thales and Keycorp is designed to take advantage of each companies' respective strengths, says Alan Moss, Thales e-Transactions marketing director. Whereas Thales' North American strength is in the U.S., Keycorp has a stronger market presence in Canada, he says.
  Keycorp officials declined to discuss the Thales pact. But as Moss views the agreement, Thales will benefit by using Keycorp sales channels to sell terminals in Canada and Australia while also taking advantage of Keycorp's application expertise. "They have a lot of expertise in application architecture, which we will be drawing on for the next generation of terminals," he says.
  Moss downplays any suggestion the two companies eventually will merge. "At the moment, both sides agreed to work on the basis of a common sales approach and common development of a future platform," he says. "Going beyond that, there are no other talks at the moment."
  Thales also is looking internally for help. Over the past year the terminal maker has been reorganizing its operations, working closely with another unit of parent Thales Group, e-Security, which develops integrated fare systems, network security and encryption systems, Moss says
  "We're trying to exploit those synergies," he says. "And as part of that we identified opportunities to combine the e-Transactions side on payments and terminals with what the other group is doing."
  Thales soon expects to receive Class B certification for the Artema Compact terminal, an all-in-one multiapplication device that has an integrated PIN pad. Thales plans to gradually phase out its Talento terminal models, which rolled out five years ago, and focus instead on promoting Artemas, Moss says.
  Keycorp will market Artema compact, mobile and portable models in Canada, Moss says. He adds that there could be some overlap with U.S. merchants that operate in both countries. "It's hard to draw a line between the two markets now," Moss says.
  Thales today understands that it cannot reach out to all merchant sectors like the bigger market players. "It's a question of finding your market segments, where you are strong and can focus on your customers," Moss says. "You focus on where you can succeed rather than on everything that moves."
  The Artema models Thales is supporting suggest the niche markets the company is targeting. The portable model, for example, uses a radio frequency to communicate with a main base unit on site that links to the processor via dial-up or broadband communications. Restaurants use such systems so waiters can bring the terminal to the table. Thales also is rolling out an Artema model for unattended points of purchase, such as vending machines, Moss says.
  Thales Group does not break out financial data for its terminal unit, and the company will not divulge North American terminal shipment data. Moss concedes the company did not do as well in 2004 in the U.S. as it did in Europe, where terminal companies have benefited from a mandatory shift to chip-based card transactions. Moss says Thales has about 500,000 terminals deployed worldwide, most of which are in Europe.
  Like Thales, NBS over the past year has been restructuring. In 2004, the company reverted back to its previous name after former company president, Charles Lee, several years ago renamed the company MIST, which stood for Mobile Information Solution Technologies. After Lee left, company executives decided to return to the NBS name because it had greater brand awareness and appeal globally, says Mike Utsal, NBS executive vice president of sales and marketing.
  To help address market needs, NBS's Payment Solutions unit over the past year also created a partnership relationship with Sagem Monetel to do research, development and engineering work. Under the partnership, the companies also will share best practices and co-develop products, Utsal says.
  NBS has seen its revenues slip of late. During its first quarter ended Dec. 31, the company experienced a net loss of $2.3 million on revenues of $16.7 million. During the same period a year earlier the company had net income of $1.4 million on $24.7 million in revenues. For the fiscal year ended Sept. 30, NBS had a net loss of $4.4 million on revenues of $66.1 million. During the previous 12 months NBS reported a net loss of $17.9 million on $55 million in revenue.
  In Utsal's view, MIST suffered from an engineering-centric mindset of "if you build it, they will come." Today, he says, NBS is more market-driven and consumer-centric.
  "A lot of energy [at MIST] was spent to develop new products and release from the ground up rather than look at what the market is looking for and where can we provide a differentiated solution and efficiently delivery it," he says. "And that is common to small technologies companies."
  MIST also created its own payment gateway service and focused on promoting wireless terminals. The company set aside the success the former NBS had shipping dial-up terminals in Canada, which is NBS's primary market.
  NBS's attention today is focused on its Canadian banking partners, Utsal says. The company primarily is marketing terminals that support faster broadband, Internet Protocol-based communications links with processors. It also is continuing to tout its payment-gateway service.
  "We will still for specific customers provide dial terminals," Utsal says. "But we're not out trying to build cheaper dial terminals. There are enough other manufacturers in the market beating themselves up trying to do that."
  Instead, NBS views its role in Canada as a "boutique" provider of IP and wireless terminals, Utsal says. "We won't win deals on the basis of being low-cost compliant," he says. "But if banks and retailers want to create value and stickiness with customers through a payment mechanism, we can provide the services and skills to do that through terminals and a commerce gateway."
  The company recently released the latest version of its IP terminal, the Freedom IV for the Canadian market and Liberty IV for the U.S. The company also plans soon to launch its next-generation wireless device, the Liberty V in the U.S. and Freedom V in Canada, Utsal says. He says the company has about 7,000 wireless terminals deployed in North America, about 2,000 of which are in the U.S.
  Internal Issues
  While Thales and NBS are using partners to help overcome market barriers, another small North American terminal maker faces its own challenges. Like NBS, Linkpoint International, the terminal unit of Greenwood Village, Colo.-based First Data Corp., views its role as a boutique provider of payment terminals. However, the company plays solely in First Data's playground. As such, Linkpoint is different from other small players in the market because it is not trying to provide terminals to meet the needs of the entire marketplace, says Chuck Chegas, director of the Linkpoint POS Group.
  While other companies are touting IP-based terminals, Linkpoint remains focused on providing dial-up terminals to First Data Merchant Services' mom-and-pop stores, Chegas says. "That's what people want," he says. "Before [other manufacturers] sold boxes to create the best mousetrap. But what's ideal is what's needed, not what's neat."
  Linkpoint last year shipped 50,000 dial-up and wireless terminals in North America. In 2003, the company shipped about 43,800 units, Chegas says. First Data does not make public Linkpoint financial data.
  The company's main product is the Linkpoint AOI, or All In One, a basic debit/credit dial-up terminal that also supports TeleCheck, electronic check acceptance, gift card and electronic benefits transfer applications. The company also supports a Motient wireless device, the LP9100, and a GPRS terminal, the 9100G.
  Larger Players
  Larger players in the North American market also are adjusting their marketing emphasis. Phoenix-based Hypercom Corp., for example, which in the recent past focused its marketing attention on high-end ICE multifunction terminals, today is emphasizing its basic T7Plus device.
  "A lot of merchants and ISOs want just the plain, economical credit/debit terminal at a fair price," says O.B. Rawls, Hypercom president, North America. "Everybody tells us they want an economically priced terminal, so last year we went after that to capture share."
  Some observers say Hypercom's shift in marketing emphasis to a basic terminal illustrates the company's growing reliance on independent sales organizations to distribute its products. "The ISO segment is probably more focused on cost, which by default means more basic terminals," says Peter J. Swanson, vice president and senior research analyst at Piper Jaffray & Co., a Minneapolis-based investment firm. "But I wouldn't say it's happening across the board."
  Swanson does not track Hypercom's performance but does follow one of the company's chief competitors, New York-based Lipman USA. Lipman officials did not return e-mails seeking interviews to discuss market trends. Officials from another Hypercom competitor, Ingenico, also did not return multiple calls seeking interviews. Market leader VeriFone Inc. has been in a quiet period since announcing plans for an initial public offering of company stock ("Back in the Public Eye," March).
  While most of the leading terminal makers last year shipped devices that are IP capable, most merchants are continuing to use dial-up links to connect to processors, Rawls says. "IP made a big buzz last year, but not a lot of splash," he says, noting that probably only a couple thousand installed IP-capable terminals are using IP connectivity.
  Hypercom in March announced fourth-quarter net income of $4.5 million, down 48.3% from $8.7 million in the same period last year. Net revenue for the quarter totaled $79.7 million, up 25.7% from $63.4 million during 2003's same period. The terminal maker's full-year net revenue of $255.2 million was up 10.2% from $231.5 million in 2003.
  For the year, Hypercom had a net loss of $8.7 million, which compares with net income of $4 million in 2003. The 2004 net loss reflects a second-quarter reserve of $11.3 million related to the uncertainty of future payments from the Brazilian Health Ministry for terminal orders.
  Hypercom also announced a restatement of earnings for the first three quarters of last year that resulted in a $2.9 million reduction in revenue and a $2.2 million reduction in net income for those quarters. During a March 3 earnings conference call with analysts, Chris Alexander, Hypercom chairman and CEO, said the restatement was the result of reclassifying 3,200 leases from sales-type leases to operating leases from Hypercom's United Kingdom subsidiary, Hypercom EMEA.
  "The net result of the adjustment is that we will be recognizing revenues and profits from these leases over their life, as opposed to recognizing revenues and profits at the time the lease was issued," he said. The restatement caused a flurry of lawsuits against the company filed by law firms representing shareholders. Alexander would not discuss the litigation.
  John Smolak, Hypercom chief financial officer, noted during the conference call Hypercom's discovery of weaknesses caused the company to conclude that internal controls over financial reporting were ineffective as of the end of last year. The weaknesses, he said, were inadequate procedures in support of contract administration and significant deficiencies with respect to the company's analysis, evaluation and review of financial information.