Operator: Good day, ladies and gentlemen, and welcome to the Second Quarter VeriFone Systems Earnings Conference Call. My name is Philip, and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the conference over to your host for today Mr. Doug Reed, Senior Vice President, Treasury and Investor Relations. Please proceed sir.
Doug Reed - Treasurer and VP, IR: Thank you, Philip, and welcome everyone to the VeriFone financial results conference call for the second 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 June 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 Interim CEO, Rich McGinn 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 the 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.
On today's call, we will be referring to income statement items on a non-GAAP basis. 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.
Now, I would like to turn the call over to Rich McGinn, Interim CEO of VeriFone.
Richard A. McGinn - Interim CEO: Thanks Doug, and good afternoon, and thank you for joining us today. I appreciate this opportunity to speak with you today. A lot has happened at VeriFone in the past few months. I'm sure you have many questions which we will address shortly.
Plan today is to walk you through what has been going on at VeriFone in the past 90 days, what I've been doing since I was named Interim CEO. I will also share with you some of the changes that are already underway at the Company, changes that I and the team here at VeriFone feel confident will once again put the Company on a growth path.
Having said that, we are well aware that we have significant short-term challenges impacting our fiscal year 2013 results. Challenges have resulted in a miss to our financial guidance for the year, including significant takedown disclosed today for the second half of 2013. We are addressing the issues that have caused our current situation head-on for the benefit of sustainable mid and long-term value creation. This includes significant and necessary personnel changes, which we have made during Q2.
What I want you to understand at the end of this call is the following. As I just stated, we're facing our issues head-on. We know we have them, including some issues of product competitiveness in selected markets. Second, we have and are taking immediate and decisive action, starting with a major shift in the mindset that incorporates greater connectivity to our customers and their current and future needs.
Third, we have good competitors, but these issues are not a function of competitors leaping ahead with the famous notion of disintermediation. These are home-grown issues. We caused them and we know how to fix them.
Fourth, VeriFone is an excellent Company with a great franchise in the payments technology business. We are a global market leader in the industry and that industry is expected to grow in the mid-to-high single digits per year. We will build on our position. Moreover we have a solid balance sheet. We generate significant free cash flow and we have a gross margin structure that gives us the resources to invest in the areas we need to in order to ensure a terrific future. It will take some time for us to get back on a growth track, but by the end of this call I hope you will see why we have every confidence that we'll get there.
To set the stage VeriFone has been an innovator and a leader in the payments industry for decades. Unfortunately certain products and investment decisions taken in the recent past have had unintended consequences that have negatively impacted that position. Our beliefs about productivity improvements in R&D have proven not to be correct.
The result, not surprisingly, has been that some customers in selected markets have made choices to meet an immediate need with non-VeriFone products.
In addition we had a poor track record of completing certification of products in a timely fashion. This has contributed to customer and partner dissatisfaction.
Since taking the helm this quarter I have made it a priority to meet with customers in selected markets and to listen to their views on VeriFone; what they think we do well, what they think we can do better and what they need from us. But honestly it's been an eye-opening process. They have been brutally honest about our lack of partnership and it has been made clear to all of us at VeriFone that things have to change. On a positive note I've heard many encouraging comments from our customers about our people at VeriFone and the deep relationships that they’ve built over the years. Our people held the line when the institution fell short of expectations. The great news is that the people of VeriFone and our customers understand our core strength and fully embrace the need for change. Part of the change at VeriFone is shifting to a customer focus and a willingness to invest in technology to support these customer needs. That focus will give us a higher quality approach to sustaining and building our business. We have good competitors, but we have to move on.
Let me also discuss an issue noted in our prior quarter. We faced an issue with our Middle East distributor selling into an embargoed country. This is not the kind of business we need or want at VeriFone, and it will not happen again. We terminated our relationship with the distributor in the Middle East who failed to live up to our ethical standards and to the requirements of our government. We engaged outside counsel and following the investigation, we self-reported to the U.S. government. We are addressing the consequences of this activity.
This has hit our current period performance quite hard, and will have a negative impact on our results. We could not allow our brand to be dragged down by others who do not act in a manner consistent with our standards. We are feeling the short-term consequences, but we've done the right thing for the long-term. We're beginning to rebuild our business in the Middle East and sub-Saharan Africa. This will take time.
Before I walk you through what we've done over the past few months, I'd like to share some thoughts on our M&A activities. I feel good about the companies that we've bought in recent years and the value that has been created. Going forward, our primary focus is on our operations. In essence, we are focusing on organic growth.
For the past 90 days, we've been engaged in an in-depth analysis of our existing terminals, services and content delivery business. This analysis has given us a clear understanding of our considerable strength and our shortcomings. It has also allowed us to vividly describe the case for change here at VeriFone.
Here are some of the actions that we've taken so far. On the management front, we have put a new senior management team in place from sales, R&D to operations to finance. It has been comprehensive. We replaced a significant number of general managers as well around the globe; Europe, the Middle East, and Asia. This is now a strong group of business leaders. We will be adding additional talent to this group in the next weeks and months. I feel good about the team we're putting together.
On the R&D and product front, first and foremost, the lack of R&D investment for some of our important customers to seek solutions from competitors. After years of meeting their needs with great products and service, we took a decision about investing in new product development. This lack of investment has resulted in delayed product releases and a poor track record of completing those products. All of this has contributed to customer and partner dissatisfaction, which is now manifesting in the top line decline. To reverse this, we have prioritized and authorized a substantial increase in both R&D and sales to reestablish our traditional strength in high-quality devices. Here are few examples.
To help improve our ability to serve our customers well, we significantly increased investments in next generation POS devices, wireless, portable terminals, unattended POS devices, and mobility or MPOS enabling systems and the software for our most critical markets.
We are expanding our global base software platform to include an MPOS applications for our partner community targeted for the growing opportunity with Tier 3 and Tier 4 merchants migrating towards tablet based POS.
The application will be available for iOS tablets later this month with an Android version available later this year.
We have begun working with selected customers in Europe to offer cloud-based management information services, based on the many transactions we handle. Our customers seek great value in the detailed information they were able to get from us.
We have made a decision to leverage the substantial intellectual horsepower in the development community beyond VeriFone.
This strategy will take some time to develop but we have begun to consolidate our R&D investment on our Linux based operating system software platform.
We have decided to open this platform up to developers who publish SDKs and developer support. As part of this effort we are putting existing customer critical applications to this new platform. The response to this has been very positive.
As well we are adding more field applications engineers to address opportunities at the customer interface. We are also focusing on substantial operational change including reviewing our supplier relationships operational measures such as quality assurance, inventory management. We are overhauling our demand planning and supply chain operations which we expect will yield increased value for us as we build new products reducing cost and improved inventory turnover. On the financial front, we're focused on improved cash management, which we believe can go and will go hand in hand with solid growth in the business. On the systems front, we're investing in our systems infrastructure to be able to provide value-added services to our customers through our local and regional gateways and generate more revenue per employee. On the litigation front, we are moving ahead to resolve a number of lawsuits which have been facing us for quite some time.
Last but most importantly, on the customer front, the conversation with our customers and our partners is changing for the better. Our mission is to regain their confidence by virtue of our action and it’s beginning to happen. We are once again being seen as a critical player in their strategies as they reinvent the shopping experience for their customers and have flexibility in the way to pay enabled by different thinking and new technologies.
I'm very happy to report to you that there are good things that are happening. Recently, we won a hotly contested payments platform award with a very large U.S. multi-lane retailer for integrated services, terminals and cloud-based device management. This was a unified company effort and an important competitive win for us. As well, we won an important mPOS platform for the large U.S. retailer who is widely embracing mobility in payments as a way to define a frictionless shopping experience for their customers. This is an important new customer for us. We won important positions with major customers in Italy and Spain, improving our positions in these markets. And additionally, we won a substantial piece of business with a U.S. petroleum industry leader for both systems and services. These were all very competitive engagements and they are indicators of what we are capable of doing, what we are capable of accomplishing when we focus and we allocate resources.
I hope this is giving you a good sense of how we are evolving VeriFone and what we've been doing for the past three months. We are part of an exciting and dynamic industry that presents us with great opportunities. The payment industry is a vibrant worldwide growing market, which continues to expand as consumers move inexorably from a world where value exchange is defined by cash and checks to one of electronic payments. There are approximately 17 trillion of electronic payments worldwide, not counting P2P transfers. VeriFone Technology drives nearly 7 trillion of that total worldwide. 75% of our business is outside United States and 100 billion transactions in a year go through our devices.
Annual card spending to grow rapidly and it will reach nearly 20 trillion dollars in next few years. All of this will occur as the exchange of value at the point-of-sale continues to grow more complex. All of this translates into a global market for devices growing at mid-to-high single percentage per year.
Additionally, the global market for Payment-as-a-Service where we are well-positioned is growing even faster in the 11% to 13% range. There is no lack of opportunity for us in this industry. Competition from traditional competitors and new entrants is robust, and speaks the vitality and the opportunities in the marketplace. At VeriFone we need to take advantage of these opportunities with better decisions, better execution. We are making choices and allocating resources to build on our core strength.
Now I'd like to turn it over to Marc Rothman our new CFO, who joined us this past quarter as well. To review on our results and I'll come back after his remarks to provide some additional perspective. Marc?
Marc E. Rothman - EVP and CFO: Thanks Rich. Consistent with the company's past practice we will be referring to certain income statement items on a non-GAAP basis. Let me begin by highlighting our key financial metrics.
For the second fiscal quarter we reported revenue of $430 million compared to $479 million a year ago down 10%. Our results for this quarter were $5 million below the low end of our previous guidance.
Non-GAAP earnings per share of $0.42 compared to non-GAAP earnings per share of $0.64 a year ago. Our results were also $0.03 below the low end of our previous guidance.
Our GAAP earnings per share loss of $0.54 compared to a profit of $0.03 a year ago and includes $69 million in reserves for litigation matters, and our cash flow from operations was $79 million versus $31 million a year ago significantly better than our plan. This was as a result of increased focus and improvement on cash generation and better working capital management during the quarter.
I'd like to discuss briefly our regional results. Our North American business recorded revenues of $122 million reflecting a decline of 6% compared to a year ago. This decrease relates almost entirely to our petroleum business due to timing of customer orders. In Petro, we won a significant site point-of-sale contract with one of our largest customers during Q2 and that is expected to generate approximately $50 million of revenue over the next several quarters.
In our U.S. retail business, we continue to see strong demand for our core integrated retail offering, the MX 900 series. In the quarter, we won 12 customer awards with our MX 900 series platform from the incumbent competitor without losing a single customer. This includes brands such as GMC, Trader Joe's, (Felc), Gymboree, Aeropostale, (Casual Man), John Deere, Vitamin Shoppe, Express Fit and Pacific. VeriFone has shipped more than 150,000 MX 900 series products in the first 12 months of our life.
Revenues in Latin America for the second quarter were $85 million, down 11% year-over-year and 8% on a constant currency basis and up 17% from last quarter. In Brazil, which represented almost 60% of our Latin American business, we are progressing on our certifications of 3G products in order to meet the growing demand in the market. In addition longer-term, we continue to see mounting interest in our taxi and mobility solutions especially as the country begins preparations for the 2014 World Cup and the 2016 Olympics.
Turning to Europe, the Middle East and Africa, revenues of $173 million were down 16% year-over-year and comparable on a sequential basis. We were disappointed with our performance relative to our expectation in certain key European, Middle East and Africa countries, specifically related to delayed product certifications in Europe and certain distribution channel changes Rich just discussed in the Middle East and Africa.
Having said that, we are significantly investing in this market to enhance our portfolio and begin to rebuild our distribution channels. On a very positive note, in Russia, we won 80% of the product tender for Sberbank, the country's largest bank. The total award of 450,000 small and medium business payment terminals over two years creates a solid foundation for future business growth in this country.
Finally, turning to Asia, Q2 revenues of $50 million were up 2% year-over-year and on a sequential basis sales were down 3%. Sales in our China market grew 11% on a year-over-year basis, and in India sales regained some momentum with customers placing orders for new terminals to meet compliance mandates.
Turning now to our system solutions and service revenue and margin. Our systems solutions. revenue was $279 million in Q2. This was down 19% from the prior year. The most significant decline was in Europe, Middle East and Africa with small reductions in North America, Latin America and Asia. Revenues were down 1% sequentially whereby declines in North America specifically our petro vertical were substantially offset by increased sales in Latin America. Our services revenue were $151 million in Q2, an increase of 11% year-over-year and 2% sequentially. Services revenue represented 35% of our total revenue in Q2, up slightly on a sequential basis. Our Point services business delivered service revenues of $49 million and continues to do very well growing 26% on a year-over-year basis.
Our Point's installed base of All-In-One systems, those based on the Point Payment-as-a-Service model grew 27% in the last 12 months. All-In-One is our name for the multi-year contract combining systems and services. In the All-In-One offering 30% of our sales are for a higher price premium and premium plus packages compared to approximately 20% last year as customers see significant value in the additional feature sets.
Overall gross margins were 42.2%, a decrease of 140 basis points from our first quarter and down 240 basis points from a year ago. Our System solutions gross margins as a percentage of revenue was 40.8%, down 380 basis points from the prior year and 160 basis points sequentially. This decline relates to less favorable geographic and product mix. Additionally, we have experienced some gross margin pressure in our Europe, Middle East, and Africa region due to selling price pressure and customer mix. Our Service gross margins were 44.9%, a decrease of 80 basis points from Q1. This sequential reduction primarily reflects the impact of lower taxi advertising revenue this period.
Let me now discuss operating expenses. Last quarter we stated our intention to increase resources related to enhancing our product portfolio. This is a decision that we continue to believe in and we will continue to move forward on. During the quarter, our operating expenses were $115 million, an increase of $6 million over the prior quarter. R&D increased by $3 million as a result of our increased investment in product development.
While we're investing in future products and service offerings, we're also focused on being efficient in our spending. A very important and significant wide initiative in the quarter relates to further centralization of our procurement activity. We see significant opportunities to consolidate suppliers, reduce complexity and drive significant savings. This is an ongoing and strategic project which we will update you on periodically.
I wanted to also make a few comments on other significant charges incurred during the quarter, which are included in our GAAP results. As we have previously disclosed in our regulatory filings, the Company has several outstanding legal matters. During the quarter, we engaged in significant settlement discussions with respect to our 2008 shareholder litigation and to a much smaller extent, litigation related to pre-acquisition Hypercom matters which collectively resulted in a $69 million charge. While these matters are not yet finalized, we believe the amounts reflect an appropriate estimate of the ultimate outcome for these matters.
Also during the quarter, we recorded an $8 million non-cash charge related to our U.K. taxi business due to unfavorable business conditions in that market relative to our earlier investments and expectations. Additionally, we incurred severance costs related to our recent executive management changes. Please refer to our financial schedules in our press release for further information.
Now let's take a look at our balance sheet. We are very pleased with our progress this quarter on improving both the balance sheet and our focus on cash management. Cash flow, as Rich commented, will be a key priority for the entire VeriFone team. Our cash balance of $506 million grew $29 million from the prior quarter, and our net debt is $773 million, down $199 million from this time a year ago.
Continuing with the balance sheet, our accounts receivable balance declined to $316 million and a related days sales outstanding improved eight days to 66 days. This improvement is due primarily to additional focus and work toward an effort, coordinated effort amongst our sales and collections teams. Inventory of $181 million decreased by $8 million and inventory measured as days of supply decreased one day to 67 days. We plan to make continuous process improvements around our demand planning activities to optimize inventory levels and improve our overall product costs.
Accounts payable ended the quarter at $151 million, a decrease of $4 million quarter-over-quarter. Our days payable outstanding for the quarter decreased from 57 days in the previous quarters to 55 days. We will be reviewing our payable terms with our vendors on a regular basis. In addition, as part of our centralized procurement initiative I noted, we intend to review opportunities to further manage payment terms with our select vendors as well. We will be very focused on these initiatives to improve each of our cash conversion cycle metrics as well as our cash flow moving forward.
And now moving forward to our cash flow. In the second quarter of 2013, cash flow from operations was $79 million. During the quarter we invested $20 million in capital expenditures including $9 million on revenue generating assets mainly systems for our point deployment and taxi business. And our free cash flow is $58 million for the quarter. This was a substantial improvement of $33 million in the first quarter.
As a result of potential payments related to litigation matters I highlighted earlier. We expect cash flow from operations to be impacted by approximately $69 million over the next several quarters. Excluding these payments we expect to generate an additional $40 million to $50 million of free cash flow in the second half of this year.
On a more challenging front we are lowering our guidance; we now expect our non-GAAP revenue in Q3 to be down sequentially to approximately $400 million. We also expect our non-GAAP earnings per share to be approximately $0.20. This reflects the competitive challenges for certain of our product lines in select markets. As well as our increased investment required to generate higher growth over the mid and long term.
For the fourth quarter we expect modest sequential growth in revenue and earnings per share, resulting from an improved pipeline of awarded transactions specifically in North America. We would expect Q1 2014 to be another rebuilding quarter, reflecting some improvement sequentially. As we build our pipeline with new products, complete our product certifications and strengthen our distribution channels in the Middle East and Africa. We expect beginning in Q2 2014 to recapture our lost market share and therefore grow modestly higher than the industry growth rates we discussed earlier. For fiscal year 2014, we will provide more guidance on our financial metrics in the coming months. We do anticipate improvements in current levels of operating margins as we refresh our portfolio and leverage our existing infrastructure.
Thank you, and let me turn the call back over to Rich.
Richard A. McGinn - Interim CEO: Thank you Marc. I would like to provide some additional color on the near-term guidance. The issues that we are dealing with have been in the making for quite a while and needed to be corrected. As Marc outlined, based on what we know now, we're looking for Q3 to be another down quarter. After pressure testing our customers and our business leaders, we have given you our best current estimate.
As of now, we expect Q3 to be impacted by the same issues that we experienced in Q2 as the impact of the Middle East distributor situation flows through the balance of this year, and this as well the spending in R&D and technical sales personnel critical to our future continues. By Q4, some of the new deals I mentioned earlier, including the U.S. petro deal among others will begin shipping more significantly, which means that this will be a plus. We'll help offset some of the near-term minuses I described. 2014, a more robust pipeline of wireless and mobile products that we are finalizing now, along with services and petro offerings will set us on new growth path, more so in the second half 2014.
I've attempted to be clear in calling out our challenges. Allow me to end this portion of the call on a positive note, VeriFone remains a market leader and very well positioned in a growing industry. There are several key messages I want you to take away from this today. Our efforts are stabilizing the business and defending our strongholds. Our relevance to our customers is high. It remains high. We are selectively expanding our attractive Payment-as-a-Service business and the customer reaction is very positive. We're focused on growing share in Asia where economic growth remains strong.
We're investing to establish leadership and mobility broadly defined. Our foundation is solid. Our rebuilding path is clear. We're committed to implementing these plans over the next few quarters to reestablish ourselves as leaders. I hope we've answered many of your questions in our prepared remarks, and one that I know that you have that we have not discussed so far is the status of the CEO search. It is the Board's desire to make a decision regarding a permanent CEO as soon as possible, which everyone agrees is in the best interest of the Company. They take this responsibility very seriously. That said, I accepted the interim job knowing full well the challenges that we have. We're not waiting for decision. We are moving ahead to rebuild this business. That is our commitment to you, our owners. Thank you very much.
With that I'd like to open it up for Q&A.
Operator: Darrin Peller, Barclays.
Darrin Peller - Barclays Capital: I just want to start off. Last quarter I know you disclosed earlier that some of the same issues that were affecting last quarter are affecting this quarter in the outlook again. You talked the last quarter about revenue deferral and some product certification issues and market share. This quarter you're saying now for third quarter $400 million, (which as you said another step down) and you said it's related to similar issues. What I think would be helpful, though, is number one if you can give us more specifics. Is it further deferral of revenue? One would think deferral of revenue from last quarter would start showing up positively by the third quarter. Maybe you can explain that. And then also on the product certification and market share, how much of that is still an issue? Is it an increasing issue versus what you saw last quarter? And then maybe just leave us with how much confidence we can have that this new $400 million revenue number is really the low and not the right level and it's going to accelerate from there.
Richard A. McGinn - Interim CEO: This is Rich. First of all, the process for estimating or analyzing the prospects of the business that have been in place for a long time have changed. We've taken a much more comprehensive view and adjusted upward risk profiles to business possibilities during a quarter. So we changed that system for how we think about our prospects. We feel that gives us a much higher likelihood that what we say is what is going to happen and we are trying to build confidence to say, that going forward, what we say is what we are going do. Very important to us, we know it's important to you. To your point on deferral, this is not about deferred revenue. There was some conversation about some expectation of some business in U.S. petro was expected in the quarter, it has been moved to the following quarter, that's not deferral per se. Really what we have here is that our distribution channel in the Mideast basically has been dismantled. We lost business last quarter, this quarter and for a good portion the rest of this year. We have to rebuild that. But really you should think about that as a step function downward in our business as we moved away from the distributor who did not meet our standards, and in fact didn't meet the standards of the government. We are working in other places to build a better and greater book of business to compensate for that but we think that the work that we're doing to stabilize the business comes in at about the $400 million level. That's the guidance we're giving for Q3. And as Marc indicated, sequentially up in the fourth quarter and then an improving situation throughout the year in 2014. To your point on product certification, this issue is an issue writ large for us, going hand-in-hand with product development because we underinvested in R&D thinking we could get more productivity out of the dollars that we were spending. It was not a correct assumption. It was a judgment and it did not work; and we have made a decision to invest more money in both the resources required for certification, finalization of R&D projects and in some cases to actually restart projects that were slowed down or stopped altogether and had put us in a bad situation in a few places in the world. You can see by the comments I made about the wins that we are having where we did not pull back on investments. We are doing very well. But where we did, we were not able to hold the line with the products we had in place. So, that gives us a sense that we have the confidence that when we invest properly, we'll come out in the right place. Hopefully that answers your…
Darrin Peller - Barclays Capital: That's helpful. Just based on your comments on the end of year showing up some of these new products wins, I mean, I would assume that the run rate going at fourth quarter to be substantially higher. I mean, is that something that we can count on for 2014 being sort of a step-up year from a revenue standpoint?
Richard A. McGinn - Interim CEO: Well, you say substantial step-up this year. I didn't say that and I don't think that Marc said that. I think he said sequentially higher. And what we said is that going into 2014, we can expect – during the year 2014 to have a rate greater than the overall growth rate in the marketplace.
Marc E. Rothman - EVP and CFO: Darrin, just to – again just to reiterate what Rich said, $400 million approximately for Q3, up sequentially again in Q4, and up sequentially off of that baseline not making the comparison to the first quarter of 2013.
Darrin Peller - Barclays Capital: Just one quick follow-up and I'll turn it back over. On the cash flow side from operations, really from – actually from a free cash flow side I think you said $58 million in the quarter, there was $33 million last quarter. And then, Marc, I think you said you expect about $40 million to $50 million, was it a second half or in per quarter, I mean, just can you give me more color on that?
Marc E. Rothman - EVP and CFO: Sure, Darrin, it's $40 million to $50 million planned for the second half of the year. And it reflects the takedown of the earnings per share that I discussed earlier. Additionally, it could include the litigation item of $69 million that I mentioned earlier if it gets paid in the second half of this year. It could go into next year but I wanted to put it out there $70 million, approximately $70 million may be paid in the third or fourth quarter…
Darrin Peller - Barclays Capital: The $40 million to $50 million in the second half assumes that, that $69 million is already in it.
Richard A. McGinn - Interim CEO: It does not, $40 million to $50 million assumes cash flow ex that item.
Darrin Peller - Barclays Capital: Then just to be clear why would it be, I mean you are calling for at least revenue pick up, understanding that earnings is a little bit lower why would it be only about $20 million to $25 million quarterly run rate with a similar. At least a similar revenue number for the third quarter versus this quarter, so just that investments we are making in the business to lower earnings.
Richard A. McGinn - Interim CEO: It's a combination of the revenue coming down in the second half certainly the earnings per share is coming down in the second half and that will impact the cash flow clearly our efforts and focus on working capital management will be pressed and will be looking to improve upon that number, but as of now, the range that I gave you at $40 million to $50 million ex the litigation is most appropriate for modeling.
Operator: John Williams, UBS.
John Williams - UBS: So I just wanted to dig a little bit deeper on the revenue guide of $400 million. So just looking at where you are now in the second quarter and where you are implying you are going to be in the third quarter. It implies that in all or some of the geographies you are expecting to see a pretty substantial downtick in growth even from where we are here and so what would be helpful I think is we try to model, but you could give us a sense of within the four markets, North America, LatAm, EMEA and Asia, how we should think about the sequential trend relative to what we saw in this quarter? Because it seems like LatAm ticked back up nicely, EMEA was flat which was better than down, I suppose, but how should we think about the geographic split as we look at the third quarter and potentially even the fourth quarter?
Marc E. Rothman - EVP and CFO: Very good, John, I can do that. We want to give more transparency given the state of the business today. So let me give you some color on the regional flow for the next quarter or so. So North America generally speaking, from Q2 to Q3, I expect it to be flattish and ramping up in Q4 as we begin to execute on the contracts and other opportunities that Rich discussed earlier. In the Middle East and Africa and Europe, we expect continued softness that's mostly product driven, as well as the continued rebuild in the Middle East, Africa region that we discussed. And in Latin America, most importantly, although we're very pleased with the 17% growth year-on-year, we're going to see a downtick, a significant downtick in Q3 because of temporary competitive losses. There's just a number of delays in the certifications, specifically in the 3G dual SIM products that we have in Brazil, and it's in the lab and we will get them certified probably late Q4, early Q1 but that's impacting the second half of the year for us. So we're pleased we did the first half of the year in Latin America, but Latin America is going to be a downtick, temporary downtick for the second half. In Asia, real quickly, it will be relatively flat throughout the second half, in second-half relative to what we just reported. It should be maybe slight uptick with the M&A work that we did.
Richard A. McGinn - Interim CEO: Setting aside the Mid-East, the glaring example of the fact that we didn’t have product in place to get it certified, and that's a function of the decision made on resources. And now we've really redoubled our effort in that area. We understand the importance of the products. The customers tell us that, but they need stopgap efforts to put in some 3G based products that will get them elsewhere. And with the confidence that they have in us that we will deliver high quality products to them, we feel good about what happens once the product is available.
John Williams - UBS: Just if I could dig a little deeper, just into the EMEA business. So, Marc, you said continued softness and obviously the rebuild going on there, but I guess how do you think of just in terms of Symantec's softness. Is it soft relative to what you put up in the second half of last year where the run rate was basically $200 million, or is it soft relative to what you put up in the first half of this year, which is $170 million, $175 million or so?
Marc E. Rothman - EVP and CFO: It's a baseline off of the current numbers this year, so the $173 million that we had in Q2 that's the baseline and it will be modestly down from those numbers.
John Williams - UBS: The other question I had was just in terms of the incremental EMV impact in the U.S. particularly starting to filter its way into the model, how do we think about that, when should that start to come in, because my sense is that investors are looking at '14 now for the most part, and I just want to make sure that again as we think about that we're bringing that EMV impact in at some point as an incremental improvement?
Marc E. Rothman - EVP and CFO: The marketplace is beginning to make some moves now to embrace EMV. Some important players are making decisions to implement EMV and also NFC in their future rollouts. We expect that it will increase during 2014. Again, we're talking non-petro here, which has the capacity to wait until 2017. But we expect it'll be in full bloom by the end of 2014 and 2015 and that is something, of course, given our relationship with the customers in the U.S., we have a good position to take advantage of, but it doesn't occur to any great extent during the early part of the year.
John Williams - UBS: And are the products generally in the U.S. much more I guess in tune with what customers need and are they compliant for that roll out, or is there any additional work you might have to do here to make sure you're providing the right things?
Richard A. McGinn - Interim CEO: The good news about this is that we have been deploying EMV products around the world for years now, with 75% of our business ex-U.S. So we are well positioned in terms of both knowledge and experience in doing this and bring that to bear on the U.S. rollouts in a very positive way.
Operator: Julio Quinteros, Goldman Sachs.
Julio Quinteros - Goldman Sachs: Maybe just real quickly on just the fine-tuning of the model, couple questions on the cash flow side. The $40 million to $50 million, that was a second half number, not per quarter, correct?
Marc E. Rothman - EVP and CFO: Correct Julio.
Julio Quinteros - Goldman Sachs: And then what is the quarterly run rate on the CapEx components, the PP&E and the investments revenues, quarterly if you have them or per annum?
Marc E. Rothman - EVP and CFO: I'm sorry Julio.
Julio Quinteros - Goldman Sachs: Sorry, either quarterly or for the second half, however you guys have them?
Marc E. Rothman - EVP and CFO: For the second half of the year we expect the CapEx numbers to be approximately $50 million, so probably $23 million to $25 million in Q3 and up slightly from there reflecting continued deployment of these revenue generating assets that we have for the Point business model and our taxi model, and some of our Secure PumpPAY on the petro side. That would be my expectation at this point for the second half of the year.
John Williams - UBS: So that's both, the normal PP&E plus the revenue generating assets combined?
Marc E. Rothman - EVP and CFO: That's correct.
John Williams - UBS: Okay, got it. And then just maybe going back to North America, I think you guys characterized some of the weakness there as almost all of it being related to petro, but to also have another quarter I guess of flattish type numbers. Is there something else that's also impacting the North America side, because the press release obviously cites good strength and relative sort of no losses there in terms of competition, but the numbers seem to be a little bit flatter than that? Again, I think I just want to make sure that that's related to petro or is there another call out there in terms of North America revenue growth.
Marc E. Rothman - EVP and CFO: Sure. When you define it as North America as opposed to United States, there have been losses in Canada in share (because) we did not deliver quality product on time to Canada, and that is a direct impact to us. You're seeing a pattern here. We didn't put the resources on the project or a given set of customers in a country, we did not do well. We give up share or we get delays. Where we have invested, we are doing well. So that's why we feel very good, feel very confident about the actions that we're taking and the impact that those actions will have once those products roll out.
John Williams - UBS: So there's a clear distinction between U.S., North America and Canada obviously impacting North America. Maybe just as a last point on that, if you focus just on the U.S. business, small merchants versus large merchants, and just maybe call out new entrant impact, are you seeing any competitive losses away from you guys in the U.S. because new entrants are there with their dongles or their integrated POS systems or tablets, whatever? If you can just distinguish in terms of competitive dynamics for small versus large in the U.S. alone, that would be great.
Richard A. McGinn - Interim CEO: Sure, Julio. To a great extent, VeriFone has been addressing the tier 1, tier 2, to a lesser extent the tier 3, tier 4 products overtime, the opportunities. And new entrants that are coming with very interesting kinds of technology and business models have in the main come in to address the tier 4, and more recently some of the tier 3 opportunities. We see those as good competitors. We've looked at these things. We think that there's opportunity there, but really it hasn't been a big impact in growth for us or a diminution of our growth. I think recently, one of the competitors in that space said that they are now processing $15 billion total of payments in a year, and that's good, that's substantial. That's not a place where we are well represented at this point in time. But I think that with our move to new tablet-based systems for the tier 3, tier 4 partners and ISOs and others, we will be able to expand the marketplace where we're really not that present today. So we see an opportunity for an uptick, and if there were no competitors, it would probably signal it's not a very attractive marketplace.
Operator: Jason Kupferberg, Jefferies.
Jason Kupferberg - Jefferies: So you gave us a pretty decent sense of how you see the revenue picture unfolding as we move into and throughout fiscal '14, but I wanted to see if some of those same comments around sequential growth also apply to the EPS run rate beyond Q4 of this year, just considering the fact that you are making these elevated investments and it sounds like those are going to be lasting more than a couple of quarters. So how should we start to think conceptually about the EPS picture on a quarterly basis beyond Q4 of this year?
Marc E. Rothman - EVP and CFO: Jason, this is Marc. What I've tried to do today was to give you some color relative to 2014 on the top line. My expectation, our expectation is that as our top line grows, we are going to leverage the infrastructure investments that we've made today and we are planning – we'll provide more information as we progress into the year, planning for gross margin improvements with a refreshed portfolio. We'll provide more color on that as we get into next year or late into this year. And that would – I have an expectation that that would improve our earnings per share performance. But it's really color and direction only right now. We'll get into more specifics in the coming months.
Jason Kupferberg - Jefferies: I mean, just given where the earnings run rate seems to be heading here in the second half of fiscal '13 and then beyond that, I mean, should investors have any incremental concern around some of the covenants that you guys have? Maybe you can just refresh us on I think there were two primary covenants in there in terms of couple of ratios?
Marc E. Rothman - EVP and CFO: So, you saw this quarter we've generated a significant amount of cash and the cash is at the record level of $506 million; that's the second highest level actually over the last several years. We have opportunity to pay down some debt if we choose to, but right now, you are right, we do have certain financial and maintenance covenants and we expect to be able to manage through those.
Richard A. McGinn - Interim CEO: One of the good things about this business is that when you focus on it, you produce cash. It's a very, very good position to be in and we intend to improve upon that by virtue of the operating performance focus that we're giving it.
Jason Kupferberg - Jefferies: And just lastly, can we get a little bit more color on the progress of the CEO search, I mean, obviously you said it's a high priority for the Board, but is this something that we're weeks away from or months away from or somewhere in between?
Richard A. McGinn - Interim CEO: I don't think there's handicapping involved in that. I don't have any other comments on other than the fact that I know that the Board is really focused on doing this, and when they find the right candidate, the Board will act swiftly.
Operator: Ladies and gentlemen, this concludes today's question-and-answer session on today's conference. I would now like to turn the call over to Rich McGinn for closing remarks.
Richard A. McGinn - Interim CEO: First of all, let me thank you all for your time, your attention and your questions. We are – Marc and I, trying to give you to the fullest extent we can, the transparent view of what's going on with this business, to be open about the challenges we face and as well about the opportunities that we see as we build the business. We indicated it's a great core franchise. Where we've invested, we're doing very well, thank you; and we intend to expand that to the other areas where there are substantial opportunities. We expect to capitalize on that, and to reestablish ourselves as leaders over the next year. Thank you very much. I appreciate your time.
Operator: Ladies and gentlemen that concludes today's conference thank you for your participation and you may now disconnect. Have a great day.