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Analyst: VeriFone's planned divestitures are 'right business decision'

VeriFone Systems Inc. is backing out of several businesses that are facing competitive headwinds and turning its full attention to its core payments and commercial platform.

The company disclosed in a second-fiscal-quarter earnings release that it is divesting Petro Media, its China unit and its taxi solutions segment.

At least one analyst who covers the company was surprised by the decision to sell the China segment. In a June 9 note, BTIG analyst Mark Palmer pointed out that Albert Liu, VeriFone's vice president of development, said the company was "bullish" on prospects in China during its January investor day. Barclays analyst Darrin Peller in a June 9 note of his own described the decision to divest the China and taxi businesses as "strategic course changes versus prior plans."

VeriFone has spoken of the profitability of the Asian market where second-fiscal-quarter revenues were up over 50% year over year. But during a June 8 earnings call, CEO Paul Galant said there were "increasing barriers" in China, including increased competition and downward pressure on prices.

India, because of its recent demonetization efforts, was a main driver of growth in Asia, Galant said. Although the company assumes that there will be some moderation in India, Piper Jaffray analyst Jason Deleeuw said that market seems to show better long-term growth and profitability when compared to China.

Also on the chopping block is VeriFone's Taxi Solutions segment. Back in July 2012, VeriFone was awarded a five-year contract by Washington, D.C.'s taxicab commission to develop what would become that business. VeriFone developed and implemented payment systems that integrated driver and passenger information on tablet displays for all the taxis in the nation's capital.

According to the company's website, there are now 52,000 taxis with VeriFone hardware. The company also developed Way2Cloud, a dispatch tool used today by 20,000 taxis. But the taxi industry has found itself pressured by ride-hailing companies like Lyft and Uber, the former having launched just one month after VeriFone inked its deal with the D.C. taxicab regulator.

Galant said the company has made progress in developing and launching its ride-sharing application, but said the company is "not the ideal steward" to provide the additional focus and resources required to continue to fully develop that business. An active sale has begun, and VeriFone expects to complete that process within the next several quarters.

"The business divestitures are the right business decisions," Piper Jaffray's Deleeuw said. "We think it’s going to drive more of a full focus just on the payments and commerce solutions that VeriFone does."

The businesses that are to be divested contribute a relatively small amount to the company's overall revenue, according to analysts. VeriFone's net revenues in the second fiscal quarter were $474 million. While the company did not break out the contribution of the China or taxi businesses for that period, its fiscal year guidance excludes $15 million in revenue from China and includes $60 million in revenue from Taxi Solutions from the fiscal third and fourth quarters last year.

VeriFone intends to divest its China segment to a locally owned and operated company in which it will maintain a minority interest. CFO Marc Rothman said VeriFone could end up having a stake of less than 20% in that company.

In addition to disclosing the divestitures and announcing earnings for the most recent fiscal quarter, VeriFone also adjusted its outlook for the fiscal year. The company now expects to record non-GAAP net revenues of about $1.87 billion, compared to its previous estimate of a range between $1.90 billion and $1.92 billion.