Operator: Good day, ladies and gentlemen, and welcome to the First Quarter 2013 VeriFone Systems Earnings Conference Call. My name is Derrick, and I'll be your operator for today. At this time, all participants are in a listen-only mode. We shall facilitate a question-and-answer session at the end of the conference. As a reminder, this conference is being recorded for replay purposes.
I will now like to turn the conference over to Mr. Doug Reed, Senior Vice President, Treasury and Investor Relations.
Doug Reed - SVP, Treasury and IR: Thank you, Derrick, and welcome everyone to the VeriFone financial results conference call for the first quarter of fiscal year 2013. Today's call is being webcast with both audio and slides available via the link in the Investor Relations area of our website ir.verifone.com and a recording will be available on our website until March 12, 2013.
We encourage those on the phone to access the webcast in addition to or instead of dialing in because the slides can be helpful. With me today in VeriFone's San Jose, California headquarters is our CEO, Doug Bergeron and our CFO, Marc Rothman.
First for the legalities; VeriFone desires to take advantage of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Certain forward-looking statements in this conference call, including management's view of future events and financial performance are subject to various factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. For a description of these factors, I refer you to our filings with the Securities and Exchange Commission. Any forward-looking statements speak only as of today and VeriFone is under no obligation to update these statements to reflect future events or circumstances.
In addition, today's call will cover certain non-GAAP financial measures on both historical and forecast basis. Our management uses these measures to evaluate our operating performance and to compare our results to those of prior periods, as well as to those of peer companies. Please note that VeriFone expects to continue to incur types of income and expense items that are excluded from the non-GAAP results discussed today.
These non-GAAP measures are not substitutes for disclosures made in accordance with GAAP. Reconciliations of these measures to the most comparable GAAP measures are presented in our earnings release, which is available on our website.
Please note that on today's call, we will be referring to the non-GAAP measures of revenue, gross margins, operating expenses and earnings per share. During management's presentation, your line will be in listen-only mode. At the conclusion of the presentation, there will be a question-and-answer session. Instructions on how to signal for a question will be given by the moderator at that time. The duration of this call is approximately one hour. So, we'll take one question and one follow-up per person and move on to the next caller.
Now, I would like to turn the call over to Doug Bergeron, CEO of VeriFone.
Douglas G. Bergeron - CEO: Thanks Doug, and good afternoon, everyone. For the first fiscal quarter, we reported revenue of $430 million, non-GAAP EPS of $0.51, GAAP EPS of $0.11 and cash flows from operations was $53 million. I want to use our time today to discuss the challenges we face during our first quarter, details of our underperformance and most importantly, what we are doing to aggressively address the issues going forward.
At a summary level, we felt the impact both external headwinds and internal challenges. The external headwinds were; the impact of weaker than anticipated macroeconomic conditions in Europe, delayed customer tenders and spending particularly in Asia, currency controls in Venezuela and the cancelled Washington DC taxi contract. Internal challenge included delayed product customizations and certifications and sales execution missteps.
Let me begin with the details around each of the external challenges that were factored in our revenue shortfall.
First Europe, heading into the quarter, we were starting to become of the mind that the worst is over for Europe, and with new products now shipping in Germany, we believe that the region would experience modest sequential growth, it did not. In fact we saw some of the softest European economy trend toward recession. While there are certain European countries that are performing at/or above plan for us. On balance we expect overall demand in Europe to continue to be challenged throughout the rest of fiscal 2013.
Second, several product tenders and request for proposals forecasted for the quarter were delayed or cancelled by customers especially in Asia. In, India for example anticipated sales were impacted by the Reserve Bank of India's directive to reduce and cap merchant discount rate for debit transactions. This announcement caused the acquirers to slow down our system deployment until further clarity is attained. One of our larger Indian customers also implemented a capital freeze during the quarter.
Third, we experience shortfall of approximately $5 million due to currency controls in Venezuela, typically a very good market for VeriFone.
And finally, the City of Washington D.C. cancelled our five year $35 million to $45 million taxi in-payment project after our competitors challenged the city's RFP process. This project was assumed in our forecast for the quarter and for the year. We are pursuing all of our legal remedies available under the binding contract with the city. As we await resolution, we are continuing compete in the market by selling our superior solutions to individual taxi fleet.
Although external headwinds are difficult to project, we can and will do a better job of monitoring, planning and mitigating their impact.
Let me now turn to the internal execution challenges that we faced in the quarter. Over the past 30 days VeriFone Board of Directors, my management team and I have initiated an exhaustive deep dive evaluation of our business and its operation. In retrospect we found that a number of our issues in the quarter and in the last few quarters were indeed soft inflected. First, we did not allocate sufficient resources to product localization and customization which has temporarily impacted our product leadership in several markets. Let me explain the nature of our research and development investment which totaled $139 million in fiscal year 2012. VeriFone spends approximately 40% of these dollars on platform development such as our latest generation the MX 900 Series.
This consists of spending on the fundamental product design, operating system design and security. This also includes support and maintenance of previous generation products that our customers continue to depend on and within this core platform investment we have also funded a generous ongoing development effort around the products of the future. We continue to receive industry-wide accolades that the VeriFone product platform is the industry's superior, most forward-looking architecture. The secondary of development spend is around gateway development, software application, systems for managed services and all of the necessary ingredients of our successful services transformation. We invested approximately 20% of our R&D dollars last year on these initiatives and we're seeing great return.
The final and not so well-known area of spending involves the localization and customization of our product for in-country specification. No two countries are like. This involves spending on local application, local bank interfaces, government-imposed country specific modifications, security technologies customized for specific market requirements, amongst other things and the certification of each new iteration.
VeriFone spent approximately 40% of our R&D dollar on this effort, which is widely distributed across the world and involves over 700 employees in over 40 countries. Over the past two years, the volume of these country specific requirements has grown enormously. In retrospect, we weren't hiring fast enough and allocating enough resources to keep our first to market position with a few of our product in a handful of market.
It is the multitude of these requirements that in fact constitute some of the barriers entry around our business model. In retrospect, we had a breakdown in the process that estimates these aggregate requirements and is field communication and prioritization of their needs. Recently, we took two major steps to remedy this issue.
First, we redirected all field-based engineering staff to report essentially to our EVP of Worldwide Operations. No longer do the resource reporting to the local – this will allow for better process control, more code sharing, efficiencies and time saving, and in summary a faster, better output of software and deliverables.
Second, effective this quarter, we will begin ramping up our investment in R&D to accelerate product customization and localization. We're not just catching up on product development, but we are moving ahead of the curve anticipating the markets escalating technology requirement.
This in fact reinforces what we have been saying for many years, that the complexity around the point of sale in EMV countries in particular is increasing dramatically. The market is certainly not dumbing down to dongle. It's demanding ever higher levels of sophisticated (and secure) technology, localized, customized and certified. This is a technology arms race and only two rivals have the global scale to stay at the forefront. In addition we had to build, we had issues of sales execution. First, the Middle East and Africa is an important region of growth for us, and during the quarter we adjusted the mix of our distributors, whose mandate is continued expansion into some of the emerging economies in the Middle East and further into Sub-Saharan Africa. As it turned out, certain sales to these distributors did not meet the criteria of our customer credit policy by quarter end, and therefore we deferred the revenue on these sales, approximately $23 million. In retrospect, this can only be attributed to poor sales, planning and execution.
Second, we were impacted by our sometimes excessive goals around transformation to a services based business model. Service based solution sale, which means a multi-year with a customer combining systems and services and evolves with the deferring of revenue in the embedded product component over the life of the contract, but at a dramatically improved profitability, sometimes 2 to 2.5 times to product sale.
Compensation plants have been tuned to drive this behavior, and when a VeriFone employee wakes up in the morning he/she thinks about how to help a customer with a complex basket of premium service and product, not just the product sale. As a result, many customers have started discussions, around structuring longer term services agreement (indiscernible) which show as immediate revenue. The increased attention to multiyear service initiative also caused us to lose focus sometime on near term sales and product development execution.
Going forward, it is our job to ensure that this services transformation is better balanced and better executed. Focused on the development, customization and sale of our world-class product portfolio will no longer be sacrificed for long-term services goals. In fact, it is our product excellence that gives us the inherent right to be the software and services provider for our customers.
Internal execution challenges which I've detailed for you are issues that can be solved in a matter of months, not years. We have taken aggressive steps to make this happen, again consisting of centralizing field-based engineering resources, increasing investment in product customization and localization and improving sales execution in managing transitions to our business model and distributors.
As we complete our internal evaluation, we will likely take additional steps including changes to the senior management to ensure that we have the best executive and the resource to execute our strategic plan.
Despite these challenges some things went well during the quarter. Our North American and Point businesses delivered strong year-over-year revenue growth. We continue to make good progress on expanding our Services business with wins of Standard Bank of South Africa, ChinaPNR, and VF brands of the U.S. which includes stores such as North Face, Vance and Timberland.
Now, with that as a backdrop, I would like to provide some more details on our operational results for the first quarter. I'm very pleased with our North American business, which had a strong quarter which sales up 11% compared to a year ago. We saw strength across many of our U.S. market segments as a result of our strong product portfolio. Our Multi-Lane Retail sales remained robust with 11% year-over-year growth driven by increasing demand for our MX 900 systems. Our North American Petroleum revenue was up 10% compared to a year ago, driven primarily by record sales of Topaz, the latest generation of our high-end petroleum convenience store systems used in 60,000 of the 100,000 U.S. gas station. Revenues in our North American small business sector were up 30% year-over-year, with strong growth in both U.S. sales and sales into Canada.
Turning to taxi, for the past month, taxi passengers have beta tested our new mobile wallet called VeriFone Way2Ride in New York City cabs. With our app riders can load payment cards, tip preferences, and (restrict) delivery preferences on their phone and quickly prepay their fare with a single tap using advanced sound-based technology. The tests have been very successful. We expect a full public roll out of this payments app for Apple and Android phones next month, with electronic scaling functionality to follow. We have begun integration with several leading app providers in the U.S. to enable in-taxi payment acceptance and processing for trips hailed through their app in New York City taxi.
Now, let's turn to our international results where we faced a very challenging quarter. Revenues in Latin America for the first quarter was $73 million, down 27% year-over-year and down 21% on a constant currency basis. Performance was against the tough comp as we achieved near record revenues during Q1 of last year, approximately $5 million of the shortfall from guidance was due to currency controls of Venezuela, typically a strong market for us. The balance of our Latin American shortfall was from software localization issues for our systems and the deferral of revenue from bundled systems and services contract, both of which I described earlier.
Moving on to Asia, Q1 revenues were up 11% year-over-year and up 10% on an organic constant currency basis. This year's Q1 benefited from a soft year-over-year comparison as the Chinese New Year holiday in 2012 fell in our first quarter. Although we are pleased with our Asian results for Q1, we saw delays in China RFPs and continued slow sales in India. As I discussed earlier, India sales were adversely impacted by the directive by the Reserve Bank of India to reduce and cap merchant discount rate as well as the capital freeze at one of our larger Indian customer.
In China we won a managed service contract with China PnR where we will provide a set of services to an installed base of over 150,000 systems by fiscal year (2013). Overall, we are pleased with the success of our payments as a service model in Asia, particularly in Australia and are excited about the opportunity to provide comprehensive payment solutions to retailers around the world.
In Australia, the required gateways are now been set up in the Bank of Queensland in our payment service pilot with us in Q2. In December, we announced the acquisition in the New Zealand based ENZ and Sektor Payments. ENZ is the largest point of sale provider in New Zealand, currently serving more than 40,000 merchant customers and offering customers with end-to-end payment solutions including card acceptance, devices, software, services and processing. We expect these acquisitions to close in late Q2 or Q3.
Finally, Europe, Middle East and Africa was our most challenging geography. Revenues grew 9% year-over-year. On an organic basis, however revenue in this segment declined 13% from the first quarter of fiscal year '12. The single largest cause of our unacceptable EMEA performance this quarter was the new mix in distributive discussed earlier. Delayed roll-outs, macro challenges in parts of Western Europe were the other contributing factors.
Despite these challenges, there were number of bring spots in EMEA in Q1 that illustrate the best-in-class status of our product platform and architecture and services offered. In Germany sales of our new H5000 system launched in Q4 were strong as the product is being well received in that market.
We secured a three-year managed service contract with the Standard Bank of South Africa, and we continue to be excited by our progress with our Point business. Point revenue was $57 million, including services revenue of $47 million, which grew sequentially 3% and 17% on a year-over-year basis. We continue to see outstanding progress in transforming to Payment-as-a-Service in the Point region. The installed base of all-in-one systems grew 25% in the first full year since the acquisition closed. All-in-one is Point's name for the multiyear contract combining systems and services.
In addition, we made great progress with our Point e-commerce offering signing 21 new mid-sized e-commerce deals in Finland and France during Q1. The majority of these deals are multichannel cross-channel offerings delivered from our single multichannel platform. There are a couple of examples of the type – how these types of solutions are being offered. An installment payment solution which enables a customer to make an in-store purchase with a credit card and then make three installment payments. The installments are automatically executed on the agreed date. Another solution now is that it allows a customer to reserve goods online with a payment card and later collect the goods of the merchant completing the payment with the same card in an unattended payment device equipped with a VeriFone system.
I am proud of the progress we've made on developing our services business. Over the last several years and accelerated by our acquisition of Point in 2012, our operating strategy has been to progressively expand our revenue from having a majority of one-time hardware sales to having multiyear solution from service contracts. By transforming the Company to this revenue mix over the long-term, we believe that we will achieve higher overall revenue and margins and build deeper and more integrated relationships with our customer.
As a result, this will allow us to create a more predictable recurring revenue stream that will provide us with greater visibility into our future opportunities. So far we have seen this strategy work successfully in our Point business. Point's performance and its payment-as-a-service model is evidence to the value proposition created by a robust services offering. We are confident we can recreate the success on a broader scale across other regions.
That wraps my review of the operational results for the quarter. I'll now turn it over to Marc Rothman, our new CFO, who joined Company at the beginning of February, to provide the financial review. Marc was previously CFO at Motorola Mobility and brings a wealth of valuable experience, leading financial organizations as well as global business expertise.
Marc E. Rothman - EVP and CFO: Thanks Doug. Good afternoon. As you can imagine, my first weeks at VeriFone have been very busy. I'm very pleased to be onboard and looking forward to helping Doug execute on our operational and financial plan. Consistent with our historical practice, we will be referring to income statement items on a non-GAAP basis.
For the first quarter, revenues were $430 million, a 1% increase over the previous year. Excluding the impact of acquisitions over the past 12 months, substantially all related to our Point business, organic revenue declined 7%. And on a constant currency basis the organic revenue decline was 6%.
As discussed earlier, a significant part of our shortfall related to the deferral of sales in the Middle East and Africa region. The decision to defer this revenue was consistent with the Company's longstanding revenue recognition policy and requirement under GAAP and was not a change in accounting policy or practice. In addition, as is customary, our conclusion was reviewed by external auditors in the normal course of their review of our quarterly results. Operating margins for the quarter were 18% of revenue and non-GAAP fully diluted earnings for the quarter were $0.51 per share, a decrease of $0.07 over Q1 of last year.
Turning now to our systems and service revenue and margin mix. Our systems solutions revenues were $282 million in Q1, down 10% from the prior year. Sales were down in EMEA and Latin America and were partially offset by improvement in North America and Asia. Service revenues of $148 million, with 34% of total revenue in Q1. Percentage has increased steadily over the last eight quarters. Recurring services revenues such as payment as a service and annual software maintenance increased several million dollars sequentially over Q4. This increase was more than offset by a reduction in installation services and lower taxi advertising revenue, by post-Olympic slowdown in the U.K.
Overall, our gross margin is 43.6% , a slight decrease of 60 basis points from our fourth quarter level and up 70 basis points from a year ago. In our system solutions business, our gross margin as a percentage of revenue was $42.4 comparable sequentially and down slightly from a year ago.
Service gross margins were 45.7%, a decrease of 250 basis points from our fiscal fourth quarter. this sequential reduction in services gross margins primarily reflect the impact of our lower taxi advertising revenue and certain higher margin Q4 sales not recurring in Q1. Service gross margins were up year-over-year 230 basis points, primarily due to the higher margin Point business being included for a full quarter in 2013.
Let me now move to discuss operating expenses. Operating expenses at $109 million increased by $3.5 million sequentially. Our combined R&D and sales and marketing expenses were comparable to the prior quarter. Our G&D did increase $3.1 million primarily due to an increase in professional services and a favorable adjustment to variable comp in Q4.
Moving forward, we expect our operating expenses to ramp up to approximately $120 million to $130 million per quarter, reflecting the increased investments Doug discussed earlier in his commentary.
Now, let's take a look at our balance sheet. Our cash balance of $477 million grew $23 million from the prior quarter. Our net debt is $815 million, down $164 million from this time a year ago. Our credit agreement requires us to meet two financial covenants. There is a maximum leverage ratio and a minimum interest coverage ratio. We are in compliance at the quarter end and expect based on all of our projections to remain compliant in the future.
Continuing with the balance sheet, accounts receivable days sales outstanding were 6 days to 74 days impacted substantially by the growth in deferred revenue. Inventory increased by $11 million and inventory measured as days of supply increased 68 days. Our accounts payable ended the quarter at $155 million, a decrease of $38 million quarter-over-quarter. Days payable outstanding for the quarter decreased to 57 days. This decrease was driven primarily by the timing of invoices issued by our contract manufacturers such that a larger proportion was (hit) within the quarter relative to the last quarter. Although, working capital will fluctuate quarter-on-quarter, we will have a renewed effort to improve each of our cash flow metrics going forward.
Now, turning to cash flow, in the first quarter of 2013, cash flow from operations was $53 million. During the quarter, we invested $20 million in capital, including $10 million on revenue generating assets, mainly systems for Point deployment. Our free cash flow was $33 million for the quarter.
Now, let's look forward to second quarter. Consistent with our most recent update, we expect non-GAAP revenue to be between $435 million and $450 million. We expect our Q2 non-GAAP earnings per share to be in the range of $0.45 to $0.50. For the full year, our guidance for non-GAAP revenue is $1.8 billion to $1.83 billion, earnings per share of $1.90 to $2.10 and free cash flow generation in the range of $170 million to $190 million. Also from a directional perspective, we expect that non-GAAP net revenue and non-GAAP net income per share will grow sequentially in the third and fourth quarters of fiscal 2013.
I will now turn it back over to Doug Bergeron for his concluding remarks.
Douglas G. Bergeron - CEO: Thanks, Marc. Despite our short-term disappointment, we do not believe that the first quarter short-fall reflects a fundamental weakening of either the global market for point of sales solution or our longer term competitive position in that market. As we said earlier, our problems will be addressed over a matter of months not years. We operate in a growing industry with increasing complexity and a stable or improving margin profile. Our main competitor has recently posted excellent result demonstrating that the opportunity for us to continue our decade long success story remains unchanged and our incumbency is over 20 million payment locations across the world gives us an inherent advantage to be our customers partner in providing enhanced EMV security and services based solution.
I have detailed for you the external headwind and the internal product whose sales execution challenges that hampered our Q1 results. Today, we are aggressively addressing those issues by centralizing engineering resources, increasing focus and spending on local product development and improving our sales execution with our services offering and with our distributors.
As we complete our internal review, we will also take the additional steps necessary to ensure that we have the right management team and resources to execute our strategic plan.
Moving forward, the remainder of 2013 will be a rebuilding period for VeriFone, as we accelerate investments in both product customization and our services offerings. But we expect to enter fiscal 2014 in less than eight months from now much better positioned for growth and for the increased profitability.
Thank you. We will now open up the call to your questions.
Operator: Darrin Peller, Barclays Capital.
Darrin Peller - Barclays Capital: I actually have two questions. First on the market share really I imagine that customers don't want to have one company to buy from regardless of market or geography. So can you tell us your thoughts on how long it should take to have the proper inventory ready, the proper certifications, how long – how many quarters should we expect this process you have described before you are truly ready to compete head to head?
Douglas G. Bergeron - CEO: Let me be very clear. The product localization under investment was not in every time zone in every country. It was a few here and a few there. We believe that by doubling down on some of the field engineering investments that we will have all of those issues resolved by the end of this year setting us up we think for a very good 2014. On your first question regarding customer desire for one or two solutions, my perspective is as follows. Retail customers – large retail customers prefer one solution and one solution only. I can name less than one handful of U.S. customers for instance that are national retailers that have used more than one type of system from multiple providers. When you are dealing with distributors it's also very much the case that they build a help desk in a services operation around one chosen platform. Where you get into multiple platforms is with large banks, in both the developed and emerging markets who want to have a preferred solution and an alternative for the obvious reasons, mostly around pricing. But even in those cases it's typically not 50-50, there are some exceptions, maybe perhaps in Brazil. But it's typically there's a preferred vendor, there's an alternative and we were the preferred in many cases and our competitors the preferred in other cases.
Darrin Peller - Barclays Capital: Just one follow-up now. On the financial side, how much – I mean it seems like there is a lack of visibility through the last quarter, in terms of what you were seeing shipped. So, going forward now and your guidance how much clarity and visibility, do you think you actually have in these new revenue numbers and I mean it's definitely refreshing to hear you comment that there is renewed effort to improve each of your cash flow metrics going forward. On that, is there any way you can give us a bit more detail on our bridge to the 170 to 190 range you guided towards?
Marc E. Rothman - EVP and CFO: Sure, let me make few comments and then Doug could add some more color on it. I'll give you a little bit of color on just the guidance philosophy that I have. First of all, we will do our (indiscernible) that that target that are achievable. The goal is not be overly conservative, but is sure not be overly optimistic and I think we've struck the right balance for Q2 and more specifically the full year. My point of view is to spend a lot more time with our P&L owners in the field, our general managers were managing the regions and help drive the process to meet our numbers. Having said that, I've have been here obviously just a few weeks and there's just plenty learn, but I netted out, I think our outlook going forward is balanced. When you look at the updated cash flow of 170 to 190, the downtick from the previous guidance is all driven by the reset on the annual plan, because if you look at EPS numbers it drops right down to net income numbers, drops right down to the reduced cash flow. You said our metric where a little bit more challenge this quarter and the renewed focus is just going to drive cash flow the way we drive the rest of the business. It's just going to have a lot more of my attention. The reality is that we're in a competitive environment. We need to compete consistently with our – pretty much our number one competitor on the way we give terms on our receivables and the like, but I do believe that there's opportunity to improve in that area.
Darrin Peller - Barclays Capital: All right. So, it sounds like it's a combination of the change in net income, combining a lot of CapEx basically, spending right?
Douglas G. Bergeron - CEO: Correct.
Operator: Tien-Tsin Huang, JPMorgan.
Tien-Tsin Huang - JPMorgan: Just a follow-up on the guidance for last week, question, it looks like you're implying sequential growth here going forward, I know you've got the Lunar New Year issue coming up in the second quarter. I'm just trying to understand a little but more, sort of your conference level in hitting some of these numbers, it doesn't sound like some of these things necessarily will be a quick fix. Doug, you said a matter of months not years, I get that but, can you give us a little bit more to sort of appreciate this step up sequentially?
Douglas G. Bergeron - CEO: We've typically been growing between Q2 and Q1. We have hundreds of SKUs, and we have to keep all of these SKUs current, updated, certified and the issue was significant, but it was at the margin bill. We still had lots of products in services that we sell every day that are market leading and winning technology, competitive evaluations et cetera, so there's a lot of good stuff going on inside of VeriFone today you just obviously as I am are right now transfixed by all the stuff that we need to be fixing. Perhaps, I've gotten into the spot light. The question in Lunar New Year is it's not so problematic to a quarter when the Chinese, both for demand and for supply since we manufacture in China, is at the beginning as it is the first couple of weeks of February, because we can recover over the next 10 weeks when it becomes real problematic at the end of January, when you don't really have any recovery time. So, we don't think Chinese New Year is going to be an issue for us this year.
Tien-Tsin Huang - JPMorgan: No, I mean, just asking because I guess I am worried is that these kind of disappointments, they come in bunches. So, it's obviously going to be taken differently I would imagine, which is why I was asking. But maybe just as a follow-up to just reconcile your comments about Europe specifically. How much of this was a macro versus the share loss potentially I guess to Ingenico which is doing quite well there. I am just trying to separate the macro from the self-inflicted issues you talk to. What gives you confidence that you can gain back the lost share component in Europe to Ingenico, what wouldn't it be permanent?
Douglas G. Bergeron - CEO: Nothing is permanent. We've had many cycles or many phases in the 12 years I've been here that we've pulled ahead of Ingenico with a product or product family or they've pulled ahead of us. In this case, it was a preponderance of field engineering, under-investment and some management around that. We will recover this. We have a 32-year-old brand that is a proud brand. We do a lot of really good stuff for our customers. In fact, many of them are waiting patient for us to double down in some of this investment. So, there is no long-term problem nor is there any long-term franchise impact here. Instead, it get back to our nettings, not to be overly distract by our services initiatives, but keep plugging away at that too and we'll get there. To your question on the missed, we kind of big picture 40% from deferred revenue with distributors largely in that region, 30% macro, Asian RFPs, weakening Europe, Washington D.C., Venezuela and about 30% of $60 million, call it maybe $18 million maybe even – maximum of $20 million related to these gaps in our product portfolio. We'll recover that, but our guidance reflects not a lot of enthusiasm or hope for a macro recovery pan-Europe this year. I think we are where we are in Europe and we can either adjust that reality or live in some sort of denial. I think perhaps you are living in a quasi-state of denial in terms of the fact that very few retailers are opening new stores. A lot of the compliance deadlines are behind us and the bright spot for us in Europe are obviously are now going to be Germany, because we have a competitive product, hopefully, France in another quarter. And Point, it means where every Point is executing, they are doing well and that management team is worthy of a lot of praise. I mean, they are growing in the double-digits in Europe, which tells you something fundamentally good is happening there.
Tien-Tsin Huang - JPMorgan: That's good to know. I'm glad to hear you guys are spending through it, so thanks for the update.
Douglas G. Bergeron - CEO: This is the I think the big news for employee, yes we had a bump in the night. All of us have gotten the big black eye over this, but the responses isn't to cut cost or to cut people. The responses to add investment and accelerate the hiring people, and that's typical not the response, but we're not dealing with a weakening environment, we're dealing with a stable macro environment, but an opportunity for us to return over three quarters from now fully competitively positioned to grow at the industry average growth rate.
Operator: Julio Quinteros, Goldman Sachs.
Julio Quinteros - Goldman Sachs: Maybe, Marc really quickly, can you just give us an update on the CapEx assumptions for the free cash flow number target that you gave in both on the purchase of other assets for revenue generating and normal CapEx?
Marc E. Rothman - EVP and CFO: Sure let me got to page, Julio. So, on the CapEx we've estimated CapEx numbers and the free cash flow to be approximately $80 million. $35 million of that is for the typical maintenance that could be real estate, it could be for IT support as well as some of the equipment that we need to provide our contract manufacturers. In the $80 million we're also assuming $45 million were revenue generating assets which it can push that for the payment as a service business with Point. In fact, it is also in the 8-K that we filed, you'll see a copy of the slides and there is a backup that rolls through the cash flow assumptions.
Julio Quinteros - Goldman Sachs: And I guess as you contemplate the continued growth of that service business Doug, you know, the levels of CapEx or revenue generating asset if there has been kind of moving all over the place, we had a number that was closer to $70 million just a couple of weeks ago and now we're looking at 45 million, is that because that business isn't expect to grow at the same rate or what else is going on there that is kind of causing that number to move around so much and actually moving down here which is obviously helping your free cash flow number?
Douglas G. Bergeron - CEO: Well part of it is some of our – we have downgraded the expectations for Secure PumpPAY growth this year. It's developing – the slope of the curve is just a smaller number than what will the curve we had – of the curve we had back in November and that was a major contributor. The other thing which I apologize if this sounds like it's moving around – looks like it's moving around from the outside, not all of these Payment-as-a-Services roll out outside of Europe are going to have the same financial model. We are looking at partners in some cases that are going to absorb a lot of the capital costs. We are going to do white labeling Point in some markets. So we become a little more informed. Marc is bringing a lot of hard questions to us, to me, as to why we are doing this. He has been obsessive, compulsive of cash flow and I think we are going to become a little bit more enlightened on how we can, not decelerate Payment-as-a-Service but do so in a slightly less capital intensive way.
Julio Quinteros - Goldman Sachs: Only just one follow-up. I mean a lot of the things that Marc is focused on, the field level issues that he is highlighting, talking to general managers, talking to (field executives), et cetera. Those sound like COO type roles, I guess. Is there a need for you guys to have somebody who has a better command of the operations at this point because it doesn’t sound like at least on a field level you are getting the feedback that you need now to understand what's going on and to think that the CFO was the one who is going to be driving a lot of that? It seems like – is there a layer missing there or how do you get that feedback at this point?
Douglas G. Bergeron - CEO: I don’t think Marc was implying that he is – he was going to talk to the operations folks to get the (release) down on a financial and forecasting basis. We have an executive management team right now that has over the last 15 quarters allowed us to beat and raise guidance 10 or 11 times in a row, I apologize that's not absolutely the right number. It sounds like for several years. We have potentially in a couple of places outgrown our ability in some geographies and you have heard my saying it a couple of times in the last hour about how we will be making changes. I take a very active operational role in the business. I always will. There could be more eyes and ears on the business and that's not a bad idea. The Board is all over this as well and watch this space. There will be changes made over the next several months.
Operator: Jason Kupferberg, Jefferies.
Jason Kupferberg - Jefferies: Just wanted to ask a follow-up on the free cash flow and kind of the cadence there. If we look at the EPS here for Q1 the $0.51 and we just kind of annualize that it puts you very comfortably in your full year range, which seems perfectly reasonable. Obviously with the free cash flow I guess the math is a little bit different. You had $33 million in Q1 and to annualize that would put you a bit short of the $170 million to $190 million. So, judging from your answer to the last question it sounds like the CapEx run rate is expected to stay pretty similar through the year if we are looking at $80 million for full year '13. So, it sounds like the sequential improvements are going to be on the operating cash flow, so and you have confirmed that's the case and just kind of tease out for us what the drivers are that are expected – what seems to be expected improvement in converting non-GAAP net income to free cash flow?
Douglas G. Bergeron - CEO: The cash flow will hopefully rise as revenue, and net income rise sequentially throughout the year. We've already signaled that and cash flow is a derivative of those two fundamental, and I think you're right to model kind of the flat lining of CapEx through the year. That should get you to the number if we hit the revenue sequentiality, we'll make the cash flow.
Jason Kupferberg - Jefferies: Just a follow-up. I think when you issued the press release a couple of weeks ago, there had been an indication there that your initial view on fiscal '14 was mid to high single-digit net revenue growth. are you still comfortable with that and is that a good proxy for kind of the longer term outlook that we should be thinking about for VeriFone as you implement the these new strategies to recapture market share?
Douglas G. Bergeron - CEO: Right. We lost market share for sure since the Hypercom acquisition. Some of it was planned through revenue dis-synergies and some of it was self-inflicted through – from poor management of resources and from under investment. We will reclaim that market share over the next couple of years, we will reclaim all of the ability to gain that market share back through technology, excellence over the next six to nine months, going into in fiscal '14 when we'll be talking to you in the fall, hopefully we'll be in a position to give, not only '14 revenue and earnings guidance but to give a bi framework for a longer term or intermediate term, view on the market. My sense is that the market structurally is very sound that the direction of technology complexity is continuing to move in our direction. In fact, ironically, it moved so quickly over the last nine months, we didn't keep up with it in some cases. And my personal commitment to my Board is that we will over this next year at least be in a position to grow at industry growth rates. And if that's 10%, it will 10%. If it's 4%, it will be 4%. But it's too early in '13 opine on kind of the macro backdrop for 2014. So, we'll tune that up later in the fiscal year.
Jason Kupferberg - Jefferies: Just a very quick clarification for Marc. It sounds like based on your earlier comments you are not planning any material in how the Company applies revenue recognition policies. Is that fair?
Marc E. Rothman - EVP and CFO: That's correct. If we have any changes in accounting policies, we'll certainly be transparent upfront on those changes. There have been no changes and we don't have any expectation in the near-term.
Operator: John Williams, UBS.
John Williams - UBS: First off, just on Latin America. Last quarter, you had referenced the missed revenue opportunity there. It was I think $20 million or $25 million. That seems like now what we know is that that wasn't necessarily expected. But I think just Doug if you could provide a little bit of additional info – we are just wanting to get a better sense of what the product gap specifically. So, what was the specific product gap? Have you guys begun to fix it yet and how long do you think it will take in that market, because I think that was something we were expecting would have at least a bit of a bounce back and that was a pretty material piece to balance that?
Douglas G. Bergeron - CEO: I don't think that we are correcting the magnitude of the short-fall I think a few quarters ago. I can honestly say that there is no given – there is no architecture issue or platform issue. Its localization issues or a particular products here or there. Many of them in Latin America, many of them that fit in Europe and no particular short-fall in our analysis has caused anything more than $3 million or $4 million anywhere. It's just that there has been five or six of these things, which add up to $20 million to $25 million in the quarter. I think we've described earlier in the script that Latin America had a couple of those. It also had the Venezuelan currency freeze where even monies in our bank account in that country weren't able to be extracted and also attempt good attended services contracts with products ended up being deferred. Frankly, that's the way they always should have been and they always would have been planned, but it comes down to sales execution, sales forecasting. In the future, one of the remedies is when we see big opportunities of hundreds of thousands of systems and services sales, we are just going to explain these to you and let those chips fall where they may. There is a lot of lessons learned here that a lot of ways we can – and there is a lot of ways we can do a better job. But the product efficiencies are all if – I'm not going to recite little things because they are just a bunch of little things and we are getting to them as we speak.
John Williams - UBS: It sounds like to be clear. It sounds like software versus hardware gap, is that fair to say?
Douglas G. Bergeron - CEO: Yeah. Mostly.
John Williams - UBS: I guess the follow-up on that is just as we think of scaling the pace of the investment that you have to make in R&D through the year, in the context of your segment margins, is that mostly going to come based on what you are seeing in the services side? I guess if maybe you could provide just a little bit more detail on how we should think about when we are modeling this, what the impact through the rest of '13 might look like for each of this thing? We know how to think about margins?
Douglas G. Bergeron - CEO: Gross margins are stable, so this is all as – you are going to get to operating margins overall through with an increased investment largely in – where we classify it as R&D, in some cases sales and marketing and field support, which might show up in sales, but Marc, do you want to give any more color?
Marc E. Rothman - EVP and CFO: I'd just say that it's primarily as Doug pointed out this is a system solution matter, so the additional costs that we are funding will be primarily in that business area.
John Williams - UBS: One last thing I guess when you think of regaining shares pricing something you might use to be able to do that in the next few months?
Marc E. Rothman - EVP and CFO: I'm sorry, please repeat again.
John Williams - UBS: As you think about the potential for regaining some of the share that you might have lost in the last few quarters, would you use pricing a little bit more aggressively than you might otherwise have used to try and recapture some of that?
Marc E. Rothman - EVP and CFO: I don't think so, I think our customers want to buy the best product they can, there is obviously some price sensitivity but if you are missing a software component there is no price people are going to buy from your stores. We are going to get to work on returning to the excellent product portfolio that we have always had that got us to where we are today and the market will take care of the market.
Operator: Gil Luria, Wedbush.
Gil Luria - Wedbush: So when you look at that portfolio that you have, you have some properties that you bought as part of Point and Hypercom but may not be for the ATM business and some of the networking business for Hypercom. Would you consider looking at divesting some of those to help improve your margins in terms of the mix that you have?
Douglas G. Bergeron - CEO: The Hypercom network business is doing fabulously and its margins are above the Company average margins. So premise of your question with respect to that piece is not based in reality and it is actually quite complementary, because he sell the network access systems to emerging market banks. We're very much in love with the product. I share your sentiment on the ATM services business in Point but it's a puny little business in the single-digit of million. So it really doesn't mean anything. If somebody were to come along and offer us an interesting price, we'd probably take a look at it. But it's completely…
Gil Luria - Wedbush: I was trying to ask more generally in terms of the – I mentioned those two pieces more because they're not necessarily what you're doing in terms of your strategic thrust. Are there other properties that you've gathered along the way through these acquisitions that you could eliminate in order to improve margins?
Douglas G. Bergeron - CEO: Not that I can think of. Listen, because we've been I think hyper-transformative not only through acquisition but inventing new markets, we always have to maintain the discipline when we invent a new product or services category that if it's not working tutor it, give it some help, maybe put it through a review including some externalize. But ultimately, if it's not producing the margins and the growth that you had hoped for, you can't be shy about shooting things. So, we do that all the time and we'll continue to do it. We're not in love with products or services that we invent. They have to be contributors over time. At the same time, you also have to integrate things long enough so they can reach their tipping point. So, that's the art of management that we hope to be able to execute on.
Gil Luria - Wedbush: Then very quickly as a follow-up. Can you tell us one last time what revenue was for Point in the quarter?
Marc E. Rothman - EVP and CFO: $57 million.
Operator: (Phil Stellar), Citigroup.
Douglas G. Bergeron - CEO: Remember, a lot of our cash is abroad, about 70% of its abroad and I don't think anybody would recommend paying a high friction cost to bring it back. But listen, the Board and I have – are continuing to have this discussion over time. Right now, number one focus for management is to fix the problem. We're in a great industry with one bona fide competitor and get back to work. So, we're focused 100% on operations right now and hopefully, over time regaining some of the confidence of our shareholders and with the sell-side that we absolutely have lost over the last several weeks or maybe even several months and that is tough. We'll fall in the place where we're telling we would.
Phil Stellar - Citigroup: Marc, I know you talked about improving the working capital uses of the company. Any targets in terms of DSOs, inventories, or payables that we could think about on a longer term basis?
Marc E. Rothman - EVP and CFO: If you can allow me a little bit of time here to get more into it over the next coming months, but generally speaking, our target is to have no use of working capital by the end of this year. So, when I forecasted the cash flows, you'll see that there is a working capital usage of approximately breakeven.
Phil Stellar - Citigroup: And then just in terms of the deferred revenue that you pushed forward, I mean what are you guys assuming in terms of the guidance? Is that reflected in the second quarter guidance or is that more of a back-half fiscal year event?
Marc E. Rothman - EVP and CFO: It's a combination of both. I'd expect some of the deferred to roll out in Q2 and the remainder in the second half.
Douglas G. Bergeron - CEO: But we are offsetting that. We are signing new services contract that are creating new deferred revenue. So, while we might see the beneficiaries of some of the previously deferred stuff as it hits the income statement, we're also parsing a lot of new revenue on balance sheet as well.
Operator: Keith Housum, Northcoast Research.
Keith Housum - Northcoast Research: Marc, can you help me build a bridge for the North America revenue from first quarter last year to first quarter this year. If I heard correct, I thought I heard multi-brand retailers up 11% and petrol is up 10% and small businesses were up solidly as well. So, I guess what was down then during the quarter.
Marc E. Rothman - EVP and CFO: I don't have all the details on North America at my fingertips.
Douglas G. Bergeron - CEO: I think taxi was down sequentially. I don't know if it was down year-over-year, but it was down sequentially. Just to level this off just in advertising, I know petrol was up, small business was up, (multi-lane) was up.
Keith Housum - Northcoast Research: Maybe we can follow-up later when you have a chance to go through the numbers. Then remind me here in terms of seasonalities for the Point business, because it looks like sequentially you are down just a little bit, is that more seasonal related?
Douglas G. Bergeron - CEO: No, you know they still have about 15% to 16% of their business as resale business – sorry that's lumpy. Sometimes it's in the number, sometimes it's not. The real metric you should follow for Point is the services number, because that's the fundamental flywheel that's flowing over time. And then you will get quarter-to-quarter a $5 million sale or a $2 million sale. In some instances where they just couldn't create a service contract and that's the only thing that contributes to the non-monotonicity of the revenue order on a sequential basis.
Operator: James Faucette, Pacific Crest.
James Faucette - Pacific Crest: Most of my questions have been answered. I was wondering if you could just touch quickly on market share, you've touched on Europe, can you also quickly touch on U.S. and Brazil and how you are feeling about stabilizing and regaining market share trends in those geographies?
Douglas G. Bergeron - CEO: We have no data suggesting we've lost an ounce of market share in the U.S. Our management team, our product localization group has done an outstanding job and I congratulate all of them if they are listening on defending a very large piece of market share in the U.S. and doing a very good job. Brazil, I think, we've already suggested that there was some market share lost in Brazil probably $5 million or $10 million due to product localization. Our customers still really like us, still really depend on us and are sitting in the grandstand, cheering for us to hurry up and get our act together and our product – those products that we're behind in certification back up (to snow). So, I think it's all up to us to get the technology investment in and get the sales people moving these products through. We will have no permanent market share loss here. I've been in a few crises in my life. I've never had one more where it was all within your hands, and we – with Mark's help with some of the new management team that we will be bringing in, some of the new organization that we're going to be announcing over the next couple of months, we can do this and we will do this.
Operator: At this time, there are no questions in queue. I would like to turn the call back over to Mr. Doug Bergeron for any closing remarks.
Douglas G. Bergeron - CEO: No, that's it. I think we've answered everything in a way that hopefully gives you the (indiscernible) that we have to fixing the ship and our new heightened commitment to transparency. Our doors are always open for any calls by investors or by the sell-side to help you understand how we are making progress along the way. Thank you.
Operator: Ladies and gentlemen, that concludes today's conference. We thank you for your participation. You may now disconnect. Have a great day.