Paymentus Holdings Inc
NYSE:PAY
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Paymentus Holdings Inc
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Good day, ladies and gentlemen, and thank you for your patience. You have joined the Q1 2018 VeriFone Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference maybe recorded.
I would now like to turn the call over to your host Vice President of Investor Relations, Mr. Christopher Mammone. Sir, you may begin.
Thank you, Atif, and welcome everyone to VeriFone's first quarter fiscal 2018 conference call. With me today is our CEO, Paul Galant; our CFO, Marc Rothman; and our Chief Strategy Officer, Vin D’Agostino. After our prepared remarks, there will be a question-and-answer period in which we ask you to limit yourself to one question and one follow up. An audio recording of this call will be available on our Investor Relations Web site for the next 30 days.
Certain information you will hear on this conference call consists of forward-looking statements, including management's view of future events and financial performance. These statements are subject to various factors, risks and uncertainties that could cause actual results to differ materially from our outlook. For more information, I refer you to our SEC filings, including today's earnings release and our most recent 10-K and 10-Q. 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.
Please note that on today's call, we will refer to certain non-GAAP measures. Reconciliations of these measures to the most comparable GAAP measures and other information regarding the non-GAAP measures are presented in our earnings release, which is also available at ir.verifone.com. Please always refer to this information for a comprehensive review of our financial results. Finally, all non-GAAP comparisons to the prior year reflect the impact of the -- Taxi in businesses assumed as at the beginning of fiscal 2017. We have provided financial details about these divestitures in our press release and in dedicated schedules on our IR website in an effort to be helpful to your financial modeling.
Now, I’d like to turn the call over to Paul Galant, CEO of VeriFone.
Thank you, Chris, and good afternoon, everyone. Today, I'm going to highlight our Q1 results and the progress we've made on our top three strategic priorities.
Our Q1 revenue and earnings results were better than our December guidance. And today, we are reaffirming our full year fiscal '18 targets. Q1 systems revenue declined as expected versus last year. Excluding the headwinds brought on by the North America Petro EMV push-out and last year's terminal sale surge in India, the remaining systems business revenue grew double digits year-over-year in the period. Given our strategic forecast and focus, I'm especially pleased with the team's performance in the services business line which grew 11% versus the prior year and delivered a margin of 48%. Overall services were 43% of total revenue in the quarter.
Now beyond delivering the financials for Q1, we made meaningful progress in the execution of our top three strategic priorities for fiscal '18 that will return VeriFone to growth this year and accelerate our transformation from a terminal sales company to a payments and commerce services company.
As a reminder, our top three strategic priorities are: number one, scaling our next-generation devices to accelerate growth and enhance margins in our systems business; two, connecting more of our 30 million plus device footprint through VeriFone's gateway and state management solutions to grow recurring revenue and enhance margins in our services business; and three, launching VeriFone Connect, our cloud-based omni-channel digital services platform to deliver value-added services that enhance merchants' productivity and improve consumer experiences at the point of sale, both of which will help us to further grow our recurring revenue basis.
Let me briefly update you on how we are measuring up on each of these strategic priorities through Q1. As we've stated in prior quarters, VeriFone's number one strategic priority is to deploy our new Engaged Carbon and mobile point of sale device families across the globe so that they are a meaningful percentage of all devices that we sell. Our stated goal for fiscal '18 is to generate at least 15% of total system sales from these new products to drive overall margin expansion for VeriFone and to enable our devices to run value added services.
For Q1 new products comprised approximately 7% of total system sales and our ramping on plan. As of now we are currently on track to achieve our year-end ramps targets. Scaling our new product is critical to winning market share, accelerating our revenue growth and improving our margins. In Q1, our suite of new products became available for sale in more than half of our top 20 revenue producing markets for VeriFone Systems. By the end of the year we expect to penetrate most of these remaining countries.
Specific to the Carbon pipeline we are completing several important certifications was acquires to begin pilots and distribution into their vast merchant ecosystems. We have also started to execute directly with the ISO channel, which will extent Carbon to further downstream into Tier 3 and Tier 4 merchants. We recently announced an important new partnership with Pay Safe for obtaining to this initiative. Paysafe which is a very large ISO will white label our VeriFone Connect services platform and will offer Carbon and Engage solutions to their large merchant base of SMB clients in North America.
Our global mPOS revenues grew significantly year-over-year in Q1 continuing what has been a strong double-digit revenue growth driver for VeriFone. Our recent introduction of the VeriFone e280 mid-range mPOS device has generated outstanding client feedback and could start contributing to further growth in our mPOS category in late fiscal '18. We expect to roll out mPOS solutions including value devices for all markets and client segments over the next 12 to 18 months.
Now our second strategic priority for fiscal '18 is to connect more of our 30 plus million device footprints through VeriFone's gateways and estate management solutions to VeriFone Connect, our cloud based digital services platform. By the end of the year our plan is to surpass 2 million connected devices globally, enhancing the growth of our recurring and high margin services revenue.
As of today, we have already approximately 1.9 million connected units, with recent growth lead by our North America business. We are highly focused on expanding our footprint of connected devices given the opportunity to generate more high-margin subscription based digital services revenue.
And our third strategic priority is to enable our merchant's acquirer bank and ISO and ISV clients to serve their merchants with our VeriFone Connect services platform.
We officially launched VeriFone Connect at the NRF Show in New York City this past January. Using VeriFone Connect, merchants can start, run and grow their businesses with secure and adaptable end-to-end solutions that not only enable the acceptance of payments but allow businesses to increase consumer Engagement and drive operating efficiency. Compare with any of VeriFone's Carbon or Engaged devices, Connect empowers merchants to better manage their businesses with next generation software and services.
Key features include, payment services, estate management, business solutions with merchants and consumer facing applications and new device onboarding. In support of this, we remain on track to launch our highly advanced application marketplace during the second half of the year, featuring vertically curated proprietary and third-party merchant productivity and consumer facing experience applications.
We believe the market appeal of VeriFone Connect is strong and will enable VeriFone to earn recurring revenue tie to several large services-oriented markets for the very first time.
From a financial perspective, we believe the upside potential for recurring revenue per device is meaningful. As a reminder, in fiscal 2017, VeriFone generated more than $500 million in recurring services revenue. In Q1, this base grew 13% year-over-year. We think VeriFone Connect can help us to accelerate this growth further by increasing subscription-based payments, commerce and omni-channel services that collectively have better margins than our services business as a whole.
So, on closing, for Q1, we exceeded our financial commitments and made meaningful progress, executing our top-3 strategic priorities to transform VeriFone from a terminal sales company to payments and commerce services company. with this momentum, we have increased confidence in achieving our year-end targets to get us back to growth in fiscal '18. Of course, I'd like to thank all of VeriFone's clients and partners as well as our hard-working employees around the world, for their ongoing focus and dedication in helping us achieve our strategic and financial objectives.
So, with that, let me now hand the call over to my partner Marc, for his comments including more details on our fiscal '18 and Q2 outlook.
Thank you, Paul and good afternoon everyone. First to reiterate Chris's comments at the beginning of the call, all non-GAAP P&L comparisons with prior year reflect the impact of divested Taxi in China businesses assumed as of the beginning of fiscal 2017.
So, for the first quarter, our non-GAAP net revenues of $425 million exceeded guidance and were comparable with the prior year. Top-line results in Q1 benefitted from significant strength year-over-year in both Latin America and EMEA helping to offset the anticipated decline in both North American Petro as well as in our Indian market.
Our consolidated non-GAAP gross margin in Q1 was 41.6% and it was 50 basis points better than the prior year on an improving mix of higher margin service revenue and our operating expenses were down 1% versus the prior year on a similar revenue base. Operating income margins of 10.8%, they were up 70 basis points from the prior year. In all, we delivered $0.23 of earnings per share for the quarter which was slightly higher than our guidance.
Let me now discuss Q1 non-GAAP results by business. Revenues for our systems business was $243 million, down approximately 7% year-on-year reflecting a difficult comp related to the U.S. Petro and India revenues in the prior period I just discussed. This was partially offset by double-digit growth contributions across Latin America, several European markets and then our North America SMB franchise.
Systems gross margins of 36.8% in Q1 were in line with our forecast and were lower sequentially and the prior year driven mostly by geographic mix particularly higher sales in Brazil. We are projecting significant improvements in product margins in the second half of 2018 as the geographic mix improves and we scale our new product portfolio.
Our services business generated $182 million of revenue in Q1, now is up 11% versus the prior year. Services gross margins were 48%, up 280 basis points from the prior year, now it is driven by improved services mix in North America and reflecting better over performance across all regions.
Our Q1 consolidated non-GAAP operating expenses were 131 million, was up sequentially as planned due primarily to normalized variable compensation levels but also reflect continued efficiency gains that reduce spend in non-strategic areas.
Let me now discuss performance by geography. In North America, we delivered revenues of $113 million, it's down approximately 22% as expected due to the difficult comp created by Petro EMV at the beginning of FY17. And outside of Petro the rest of North America grew 9% year-on-year with positive contributions trending across the board by our core retail and small and medium business verticals as well as our Canadian franchise.
Growth in our retail vertical came as a result of our leadership position with QSRs, robust demand for mPOS devices as well as refresh business with the earliest Tier 1 retail adopters of EMV.
We've also continued expanding our VeriFone Connect offering into new verticals accelerating the pace of new subscriptions and meanwhile our SMB vertical grew by more than 20% year-on-year for the second straight period. And for its part, we believe Petro has leveled off and we expect to begin with slight sequential growth into Q2.
We continue to drive strong results in Latin America were revenues for Q1 were 88 million a multiyear high for the region and up 55% year-over-year. Latin America has now delivered four straight quarters of double-digit sequential growth. Strength in the most recent period with broad base lead by Brazil, Argentina and Mexico.
In Brazil, [TVs] and highlights include momentum with some of our newer value-based device offerings and have shared this business growing by double-digits with expanding margins. Strength in Argentina is attributable to recent wide market initiative to faster greater e-payment adoption while Mexico benefited from market share gains with our key partners and momentum in multi-land resale.
In Europe, Middle East and Africa, EMEA, revenues of $183 million were up 10% from the prior year. We achieved solid double-digit growth rates in first net Engaged markets, once again including France and Germany as well as across several countries within our leading Nordics franchise. In addition, we benefited by favorable foreign exchange. Our service business, which drives more than 50% of revenues in the region grew high-teens.
And finally, in Asia, Q1 revenues of $41 million were down double digits both sequentially and year-over-year. On an adjusted basis, normalizing for the demand surge in India during the prior year, our Asia-Pac business was up 8% based on momentum across several cash-based economies in Southeast Asia. And as the India market mPOSs ahead of next wave of demand for terminal, we are leveraging our market leadership position to pursue vertically driven services opportunities.
Now let's turn to the balance sheet and cash flow results. We delivered solid performance again in Q1. We ended the quarter with a total cash balance of $153 million, we had gross debt of $842 million and net debt of $689 million. Our net debt levels are down now approximately $130 million in less than two years, driven by free cash flow generation.
Within our working capital metrics, cash conversion cycle also improved to 54 days in Q1 versus 54 days in the prior quarter. This matric reflects a slight improvement in days of accounts receivable attributable to better linearity. And we held inventory level consistent sequentially.
For the quarter we generated $52 million of cash flow from operations and free cash flow was also strong at $38 million. Our reduced capital expenditure levels reflected the best interest of capital intensive businesses and are now multi-year lows with total outlays of $13 million.
Our fiscal '18 expectation for capital expenditures remains at approximately $75 million and represents a 25% reduction from the levels we had in 2015 and 2016. During Q1, we repurchased 2.8 million shares of VeriFone stock completing the remaining $50 million authorized under our prior $200 million stock buyback program. And in December, as we previously announced, our board of directors authorized an additional $100 million stock repurchase program.
In addition, in early February, we refinanced our debt facility under more favorable terms to the company. As part of our new $1.4 billion credit agreement consisting of $700 million in term loans and a $700 million revolver, we extended the maturity dates of our existing facilities, we increased borrowing capacity under our revolver by $200 million and improved pricing by more than 25 basis points and made other advantageous changes relative to the terms of preexisting credit agreement.
And now let me turn to our financial outlook. We are reiterating our fiscal 2018 revenue outlook of $1.775 billion to $1.8 billion. And as a reminder, this compared to net revenues in FY'17 of $1.756 billion when excluding the divestitures of China and Taxi for the entire period.
This top line guidance of approximately 2% growth at the midpoint also reflects revenue headwinds of approximately 70 million created by higher 2017 North American Petro sales generated prior to the three EMV liability shift push out, and the 2017 India's terminal demonetization surge. Both of these heightened periods of demand occurred during the first half of 2017 with the activity in India peaking in Q2.
FY '18 non-GAAP EPS outlook remains at $1.47 to $1.50 per share. This compares to non-GAAP earnings in fiscal '17 of $1.40 which again is expressed as the material divestitures of China and Taxi had occurred at the beginning of that period. This earnings per share guidance reflects our core revenue growth assumptions, higher gross margins based on a greater mix of next-generation products and accretion from share repurchases. This is partially offset by increased operating expenses related to normalized variable compensation and increased investments in R&D to support next-generation products and services. And our non-GAAP effective tax rate is 20% as previously discussed.
Additionally, we expect free cash flow generation in fiscal '18 of approximately $125 million reflecting a meaningful improvement in our free cash conversion versus the prior year. And going forward as we complete previous restructuring-related activity, our free cash flow conversion profile will continue to improve into a target range of 80% to 85%.
Let's discuss Q2. For the second quarter, we are guiding non-GAAP revenue of approximately $435 million and non-GAAP earnings of $0.27 to $0.28 per share. This guidance reflects North America growing on a sequential basis across all three verticals for the first time since the initial U.S. EMV upgrade wave in 2015.
And in the second half we expect significant improvements in gross margin and earnings per share as we scale next-generation devices and services and deliver more than 15% of our full-year system sales from new products. Additionally, please refer to our Slide in the earnings presentation for other supplemental forward-looking financial information.
Thank you. And with that, we will now open up the call to take your questions.
Thank you. [Operator Instructions] Our first question comes from the line of Darrin Peller of Barclays. Your line is open.
Let me just start with the execution on the strategies that you have around the new devices and the connection of the new devices. I know you talked about some of the good trends you are seeing on that front. I'd be curious to hear more on maybe you could frame it in the world of sort of how much -- what inning are you now in terms of the opportunity in the U.S. market in terms of having those devices and how they can be addressable market for that's actually convert, a little more color on the succeeding numbers and then.
In terms of revenue terms can you just provide outsize a little more in terms of the services revenue opportunity from these -- specifically the new devices that are going out to the market?
Thanks for the question. Happy to answer it. So, couple of things. The North America footprint, let's just quickly start with that so that we are on the same page here. So, we've been saying all along and still believe that it's about 14 million devices, and that excludes things like dongles. These would look like normal terminals. And we break that 14 million into SMV and Greenfield at the Pump and mPOS. So, if we think about it, really the focus of Engage and Carbon is primarily at the SMB and Greenfield, where we think there is the remaining 5 million devices that's still need to be upgraded. The April '18 liability shift date, which is supposed to put the liability on merchants who don't upgrade to EMV. We have not really counted that as much of a catalyst, because we're just not seeing the pull through. So, we remain very balanced in how we are thinking about that.
In terms of the new device families so that's Engage and Carbon in North America. We distribute to two types of buyers in North America, to the tier 1 merchants which is a direct relationship and then of course through acquirers, banks, ISOs, ISVs et cetera. And the good news is that all of our client segments have significant interest in both Engage and Carbon, where I would say Engage is obviously going to have a much larger scale opportunity for fiscal '18 than Carbon primarily because Carbon is a much more complex sale. It takes longer, but it's a significantly higher price point.
So, what we're seeing Darrin is that the bottleneck to get new devices into market has always been and will continue to be certifications. We have our devices in the certification queues of just about everybody that matters in the business. And we have already achieved Class B certs in the process of getting Class A certs. As that happens, that's when we will see a ramp up in the second half of fiscal '18 in North America. And we have very very healthy pipelines. And that will of course help us with the margins in our systems business.
But we're doing this more so than ever strategically in order to create connected devices, through which we can deliver value added services and applications, that is a new and important profit pool for us that we have not been able to address. The North America team has done a great job of building that connectivity and you have heard us talk about our semi-integrated point product, which is of course part of the VeriFone Connect services business. And its that very important connectivity that is now driving globally for us to be talking about 1.9 million connected devices. it's that connectivity which allows us to get recurring revenue and as we put applications and additional services in VeriFone Connect, that revenue growth will accelerate. We think about it as our recurring revenues in the company. We've talked about $500 million of recurring revenue, connected to those devices that are the 1.9 million connected devices and so we saw a 13% year-over-year growth in recurring services revenue in VeriFone for Q1. So hopefully that framed it and helped explain some of the things we're asking about.
And let me just add real quickly a couple of financial so on the new product introduction NPI we've said that we would deliver at least 15% of our system solution business with new hardware, let's frame that up in between a 150 to 175 million, of that we look at North America to be approximately 20% of that mostly at the second half.
Just I guess I don’t think I've ever seen you disclose a total addressable market on a revenue side around this opportunity, have you -- I understand in terminal terms in terms of numbers out there and would you have to trigger on connected devices but just curious to know whether you believe that could be and maybe at upcoming for an Investor Day at some point?
Well let me give you some rough numbers. I'm going to talk about global, I'm not going to talk about North America in particularly but globally we think that the market for terminals and payment services associated with accepting consumer payments is approximately in the $60 billion range give or take. We believe that as you bring in business solutions and value-added services that TAM will double roughly.
And so, we know -- and look you can use a litmus here right. You go out to any merchant anywhere in the world and by and large when you look at what they have at their point of sale register it just looks wrong, it's got a PC or MCR machine, a Toshiba machine it's got wires everywhere, it's got a printer to the side, all of that stuff is very hard to integrate if you are trying to create a great experience for consumer and very hard to integrate if you want the merchants to have real time information about how to manage their business. We believe that the vast majority of that Frankenstein footprint is going to have to get reconciled over the next five years and so that's why we've been building devices that could do more than accept for payments that's why we've moved into iPOS which is off course our Carbon devices and that's why it's important for us to keep talking about connected devices and VeriFone Connect has a services platform for payments and commerce applications that a merchant or an acquirer can bring down to a marketplace. These are the core components to capture this additional share.
And just last question and I'll turn it just very quickly. I mean I know you guys have a pretty good set off partners on iPOS side I know Vantiv, I know WorldPay was one of them, but has there been anymore progress on any bigger brands around incremental partnerships like that to ensure your place in the iPOS group profile in the market is really substantial?
Absolutely, we have kind of learned Marc and I over the last couple of years that we are better of highlighting things which are immediately starting to scale as opposed to during pilots or development and so maybe that's why we haven't really been out there talking about it but we did have a press release that came out a couple of days ago on the largest ISOs Paysafe it's taking VeriFone Connect, Engage and Carbon and it's going to be a adding some of their own special ingredients and bringing it to their very large market of small and medium merchants.
In the second half of '18, actually between the first and the second half of '18, we have probably 10 gigantic acquirers banks that are all going to be finishing their certification, piloting and starting to scale Carbon. There is no lack of interest in the product, it's a more complex solution, you're not just accepting the payment. You're now starting to run the whole host of things, that enable the business to manage itself. So, it's a slightly different sale, but boy, the recurring revenue stream when you sell one of these devices is really superb.
Thank you. Our next question comes from the line of James Schneider of Goldman Sachs. Your line is open.
Hi, this is Lara Fourman stepping in for Jim today. Thanks for taking my questions. So, my first question was just on the margin guidance for the second quarter. I think that we were just expecting a little bit more margin extension in the second quarter. It seems like maybe it's going to happen in the second half of the year. But can you walk us through how you're thinking about that expansion especially in light of the divestitures and just the automatic bunk you should be adding from those.
Let me take that one Lara. Thank you for the question. So, the margins as we talked about in the slides does go up incrementally about 100 basis points between Q1 and Q2. But the gross margin benefits are backend loaded. The way I'd like everybody to think about the introduction of new products for VeriFone is probably about a third of the NPIs that we're targeting for 2018 on the first half and two thirds plus second half of the year.
Additionally, mix does matter. So, in this quarter as I mentioned earlier many of the developed regions' margin profiles were excellent and they did benefit from the beginning of 7% NPI in the quarter. But markets in Latin America share lower corporate average. So, we have to look at mix in terms of how we report and how we guide our outlook. But I'm very confident that we'll make incremental progress. It's crystal clear that the new products have a significantly lower bill of materials. And that we can generate margins between in the 600-700 basis points improvement. And that's the focus in terms of scaling into the second half. So, we see it in close to mid-37s closer to 38% in Q2. It's scaling overall to the lower-40s in Q3 and Q4. And it's really a combination of the comments I made NPI and geographic mix.
Got it. And then my other question was just on the new product sales. I think you guys mentioned that more than 15% of your total system sales should be from the new products. But back at the Analyst Day, I thought it was 25% for FY'18. I'm not sure if the numbers are just being calculated differently or if there is any change to the expectations there.
No, it's not the changed expectations at all. The demand side to our new products is at or above anything we ever forecasted. the fact of the matter is when you are introducing an entirely new platform of hardware, operating system, service, software etcetera it is going to take longer for you to go from the certification to the pilot to the production side, it's just the fact of life and so what we anticipated for fiscal '18 back in January of 2017 really had to do with when we were starting our certifications with these major banks and acquirers. and so, we have to manage delays, but those delays have been really on the order of 90 days I would say on average. So, the underlying momentum in the business is very much what we've predicted it's probably 90 days later than what we had hope would happen.
Our next question comes from the line of Brad Berning of Craig-Hallum. Your line is open.
I just wondered if you could spend a little bit more time talking about this is a visibility on certification process separately for Engage versus Carbon and just talk about when will you know that you've kind of got the certifications done? what's the time line that you are expecting that you will know when that is all lined up and then it's just about more about execution on order from there?
So, I've got a monstrous platform full of data that I look at in real time on where we are, which certifications across all of our products, across every single bank and acquirer worldwide. And it's a really big spreadsheet and I'm continuing to need better and better glasses to read it, but if you summarize it all together here is the story.
In order to develop a payment application on Engage it is taking a lot less time than it took us to develop a payment application on VX and MX, so that's the starting point that's the good guy and the reason for that is because we have a minimal layer on which we are building everything we call it our AVK.
The second good guy is that we get tremendous reusability once we build that payment application, we can use it across the entire family of Engage and Carbon device because the payment piece of Carbon is in fact Engage. So that's another good guy.
The third good guy is that once you certify a payment application on engage so you are certifying it on a counter pop device that same payment application can be used across the entire suite of Engage products so portables and multi-laying and transportable even the mPOS with very little modification and the incremental serve that you need for that additional and the family is a two to three week process another good guy.
Okay so we architected this to move quick. the bad guy is its new hardware, its new software and its new testing. so, the certification process for acquires has take a bit longer as they go through testing. they are also piloting it longer because again it's brand-brand new. So that's the bad guy. but overall, I will tell you that it is much simpler, much faster and much easier for us to deploy Engage globally than it was the VX and MX.
On the Carbon side, the big delta on Carbon is what happens on the Android side of Carbon. On the Android side of Carbon, you connect with a merchant marketplace, you have to port the Android side or merchant side applications on to the platform, and that's where you get the interoperability using our APIs. And that process does not require certification by the payment brands at all. That's just certification by VeriFone to make sure there is no malware et cetera.
So, in all, Carbon is probably going to take another month to where Engage takes, but the actual piloting of Carbon is going to be longer, simply because we're testing so much more than just payment acceptance. You're testing the POS, which is the cash register application. You might be testing the employee management, the inventory management et cetera. It's like a full suite of business applications that you're running. does that make sense?
Yeah absolutely. I think when all said and done with that at the end of the next quarter, are you expecting to be able to say we're pretty far complete with most of the certs. And we have good visibility on the second half or is that, that we're expecting a lot of these certs to get done 3Q? I think just trying to look for the visibility and the timing of the certification process to give kind of the confidence level and thinking about second half revenue ramp?
Yeah. So, the certifications across all the clients that we really want for fiscal '18 have all already started in one way or another. And what so we're talking about is not talking certs, we're talking about getting pilots into production. And so, you'll see a nice steady ramp of that throughout the next three quarters, where I would tell you that the bigger guys, the ones that have the most merchants tend to pilot longer. And that's why they are more backend loaded. So, you'll see second half -- you'll see that nice cliff that Marc was referring to of trying to get more margins. It's coming from those completed pilots that go into production. So, think of it as better in Q2 than Q1 for sure. But then a set function better in Q3 and then a set function better in Q4.
That's very helpful. One quick follow up on services business. If we take out the dispositions this quarter and we look at the underlying trend more specifically in North America given the QSR launch this year. Are we really seeing 30% plus type growth in that business this year? And what is behind those QSRs, how is the pipeline looking for new leans as we think about further out?
So broadly speaking on services we talked last quarter about mid-single digit growth for the services business. We reported a nice quarter relative to our expectations. We saw $182 million of revenues. So, it was slightly better than planned. So that's moving north slightly.
With respect to North America, and the retail business in particular where VeriFone Connect continues to gain traction, we see double digit growth organically in fiscal year '18. I'm not going to put -- I can't put a specific mark on it sort of 10%, 15%, 20% or more. I'm comfortable saying that it's absolutely going in the right direction, there was excellent backlog it was excellent attraction closing contract in Q1 and we look for that business to deliver double-digit growth organically.
I'll just also add that on the -- you mentioned QSR, we continued obviously to do extremely well in QSRs we've won 9 of the top 10 QSR mandates in North America, 20 out of the top 30 have already been secured by us, there are about 5 RFPs that we are currently in hunt for that we hope to do well on. And roughly I guess half of QSRs in quarter one terminalized. They have the ability to accept a card base payment using a payment terminal versus a magnetic stripe on the side of a on the side of a cash register. so, we've got a long way to go still we're doing very well and this was the area we decided to invest in heavily you may recall and it's proven to be a good investment.
Our next question comes from the line of Jason Kupferberg of Bank of America.
A maybe just a pick-up on some of that conversation around the second half ramp here just so that we understand the flow here so you talked about going through the certifications and then you go to pilots and then productions. so are we interpreting this right in that as soon as these pilots are complete and presumably successfully complete, you start revenue and profit recognition right away or is the potential for kind of a lag there. so, I'm just trying to test whether or not there is any unforeseen risk factors that could come up in the next three or four months that could jeopardize the second half P&L?
I think we've taken a very balanced point of view relative to the guidance and the 15% new product introduction. when you say is there a lag between certification and commercialization, there is time but I wouldn’t consider anything that's material time. we are open to sell those products in the market because they have been signed-off or certified but it's not like there is a lot of product in the market that's been differed or anything of that sort, so we are open for business certifications obviously this is the first step and there is just a normal commercialization I think we've taken balanced view in terms of the new product introduction rollout in the financial projections that we laid out today.
All other things being equal we are much more comfortable with the cycle from certification through production for Engage than we are for Carbon, the only reason again is that Carbon is doing a lot more than just accepting the payment. so, in Carbon we do expect and we have planned for pilots that's are more or less twice as long as the pilots for Engage which is a clear replacement of VX and MX devices.
Just as a follow-up I wanted to talk about North America SMB so obviously good to see the 20%plus growth again. What's your view on the kind of the sustainability of that? I don’t know if this is to some extent a year-over-year comp situation. Or what are some of the underlying drivers that you're really seeing. It's sounds like you're not really building in much more incremental acceleration to the April 1 deadline. So, I just wanted to get a sense of sustainability through the remainder of '18 in SMB?
Let me start and talk to that some more color of course Q1 and Q2 now with guidance 20%. We're projecting continued momentum in SMB throughout the year, perhaps close to those levels, plus or minus. And again, perhaps the April 2018 deadline could serve to be now balance incremental. We have necessarily take them that into account in terms of the projections or guidance. So that's an opportunity. We're not planning to that's not what we're hearing that it's going to provide perhaps an incremental upside. 20% is the guidance Jason, for the full year in North America SMB. And we're comfortable with that at this point. Inventory levels have been normalized. Momentum continues now into Q2. And we've got a lot of great products the market around engaging carbon coming in through that channel.
Thank you. And our next question comes from the line of Andrew Jeffery of SunTrust. Your line is open.
Hi, guys. Good afternoon. A couple of questions on the services strategy. I guess one qualitative and one quantitative. So, starting with the qualitative. Can you just describe briefly why you're confident that perhaps that you're not late in North America on Connect? There are other providers obviously similar type software-based solutions that seems to have a lot of traction in. And I don't know if you think it's installed based tougher to disrupt end markets like QSR and locally and vertical. What exactly how you think about the competitive position and opportunity given that there are some companies and market ahead of you?
Thanks for the question. One of the best things that ever happened to VeriFone was those competitors that you're referencing. What they've done is they have created a fair amount of anxiety on the part of acquirers ISOs ISVs. And those folks need a strategic partner to help them be more and more competitive and capture a bigger amount of revenue stream than what has been traditionally basic payment acquiring, an area that is not growing particularly well outside of e-com.
And so, what's been happening is that the CEOs and the boards and folks that run these things have [indiscernible] and they say okay, what do we're going to be competitive? They specially have three choices. They can either build their own, they can try to acquire somebody, or they can partner with someone that has the ability to deliver it.
And so, we believe that building their own is not something that is going to become broad based, it is a tremendous effort to do it at scale and to be able to do it with super high quality. And many of these folks will tell you that that's not their core. They're not going to build devices and infrastructure and application marketplaces and do all the integration.
The second is they can try to go acquire somebody, they are aren't that many players out there that they can acquire. And those that they can't acquire are all very-very sub scale. They don’t have the industrial strength that you really need and I think it would be a reach.
And so, the third thing that can do is partner. And they can't partner with most of the folks out there because they are direct competitors. And so, we find ourselves in a very good strategic position we are trusted by these folks because they know we can operate at high scale with amazing security and then we can deliver within the framework of how we already are doing business with that. And it's because of those things that I do not think that we are by any stretch to relate if you are talking about a landscape of millions of merchants as I said it's all around take a look at your drycleaner take a look at all the places out there, their systems look so as to 1995, so it's a PC, it's a cash register, it may or may not have terminal but it's not an integrated system they are not managing their employee updates with it they are not getting data in real time from it to feed their engagement with their consumers. And I think more and more people will want that. And by the way almost none of those things were omni-channel. So, I really don’t think it's too late. I think it's very early innings in all of this and I think we are the right partner.
And then just from a qualitative to quantitative standpoint. You mentioned 500 million of recurring services revenue growing 13% I think I have those numbers right. Can you maybe break that down a little more into how much you would consider to be next-gen or value-added versus legacy services?
Well, let's start with the way that we operate. first of all, our services business. the way we go to market is going to be VeriFone Connect, and it has already four components. It's got device services, it's got payment services, it's got commerce services and it's got omni-channel services. Device services is blue collar but has a significant portion not as big as the others but a significant portion that is recurring in nature.
The payment services are very fast growing right now for us it's all of our gateways it's all of the work we do in security through tokenization and encryption services that is roughly 30% of the total give or take and it's growing as Mark said very nicely. The commerce services are something are relatively small today, but I believe will be the fastest growing as our marketplace and the vertically deteriorated applications are brought to acquirers and ISPs like Paysafe.
And the omni-channel services which are again small today but the work that this team has done to link our 13 gateways that do the in-store traffic, the work we've done to be able to inter-operate tokens that we can create with e-com gateways is tremendous.
And so, as VeriFone Connect scales, and people want to use all of the services in VeriFone Connect, they're going to require omnichannel in order to be able to connect what their online, what their mobile, what their call centers are doing with what's happening in store.
So, we have a very detailed disciplined approach and we're seeing that the digital services of the total services pie are the fastest growing. They've got the highest margins. And we'll continue to report on them, but the recurring side of this business 13% growth is more than $500 million. And we expect that to accelerate as we bring the VeriFone connect platform up.
Thank you. Our next question comes from the line of Tien-Tsin Huang of JPMorgan. Your line is open.
Hi thanks so much. So just Latin America strong again. I know you've talked about it. But just curious is it broad based across more buyers maybe in the big two or three countries. Is the buyer market evolving there for new systems? Just curious what may be changing on the ground there both competitively but also on the buyer side?
Hey Tien-Tsin thanks for the question. A lot has changing in Latin America to the good. First of all, the economies are by and large stable. And that's pretty requisite to doing anything there as you know.
Secondly, the two largest acquirers in Brazil are starting to think about total cost of ownership and are starting to think about the value-added services, they're starting to think about Android. So, a little bit less on the hey, let's just buy a really cheap terminal and reverse such auction that's a good guy for us.
And then there are many competitors starting to pop up. And these are acquirers that three years ago didn't exist. And they have a different approach to go to market, but they need to devices, they need services.
And it's really not -- I don't see this as the tide listing of ships being the same tide that we've seen in the past. It's a much more broad-based tide, and it's really focused on going from just terminals to more services and solutions. And we see that in Mexico, we see it in Argentina, we certainly see it Brazil, we see it Chile. These are all good things.
So, given that I'm sorry if I missed it, did you provide an outlook for LATAM and I guess the regions in the aggregate for the year? Any change in thoughts there?
We didn't have the question ask, but I'm happy to give a little bit more color on that. Slightly the numbers that I provided last quarter. North America is still relatively consistent think of that year-on-year as flattish representing the Petro push-out from last year. So that was probably $50 million plus that impacted the comparison.
And then EMEA we're still comfortable with the mid-single digits. And of course, we see -- we'll see where the foreign exchange rates go. They certainly seem to be working in our favor today. And that part of the world is FX impacted for our company. So, we're still in the mid-single digits but perhaps EMEA could provide some positive upside.
Latin America the momentum was excellent in Q1 and we see that going into Q2 and second half so no were upping our perspective on Latin America and we're looking at double-digit higher double-digit type revenue growth in Latin America.
Asia Pacific we're going to be a little bit more tempered there particularly around the India, India is still working through the research from last year it's a little bit slower than expected in terms of additional terminalization and for that reason we've backed down Asia-Pac in '14 and Latin America have shown nice upside to afford that and overall were keeping the projections for the full-year intact.
And if you remind just taking really quick one just the Carbon pipeline. the target market I think you mentioned Tier 3, Tier 4 merchants. I was a little bit surprise by that, that it would go down to the four level. Did I hear that correctly and just want to maybe clarify that?
It is three and four. we actually have some Tier 1s that we want use it for different type of operations and not just in North America but across the globe. But yes the Tier 3 and 4 here is the thing and again I think some of the competitive solutions over the last couple of years have created a new standard and that new standard is that if I want to start my business I go online, I pick my provider, the solution arrives and the mail update later by the way the application and on-boarding process was instantly gratified, and not only am I going to get payments done but I'm also going to have lots of applications. So, if I'm beauty salon I'm going to have a point of sales solution that is good for beauty salon it's going to have appointment calendar, it's going to have employee management, it's going to have inventory control for some of the items that beauty salon users.
And so, the expectation has changed right it use to be that for payments you would go to a bank and for business processes you go to some local integrator the problem is that those two systems were fine with simple payments so this payments become more complex as you want to use more data it becomes much more difficult because of this security around payments.
So, I gave you a simple used case it's kind of the no brainer but it's something we are trying to do when a consumer comes to your store and shops they are either going to leave a record or not. If you have a standalone system and a cash register like a casino there is no record of that consumer you just accepted a payment.
If on the other hand you go to Carbon and a consumer goes to your store you immediately know that the CRM profile of that person and you can identify that person, so if that person is coming to your store on a regular basis you could see it and then you could automatically set's the system up so that it suddenly you stop seeing that consumer show up that your CRM system which is integrated to your payment system it's going to send that consumer an email, a text message or it's going to create a call list for you so that the merchants can actually call them saying haven't seeing you in a while they can also send through social media and they can also send a simple things like hey, we miss you, 5% on your next purchase.
So, it's that type of interactivity, that type of mass customization that those tier 3 and 4 clients have started to really embrace. And that was all taught to them by our competitors who started certainly a bunch of years before we did. Is that make sense?
Yes sir. The final question comes from the line of Ramsey El-Assal of Jefferies. Your line is open.
As you push deeper and deeper into the merchants' kind a business with these integrated offerings which are very impressive, do you ever risk channel conflict with your acquiring partners? Are they feeling like you could be developing some incremental sort of power and a value chain between the customer and the acquirer?
Absolutely not. The architecture of what we're doing is a white label solution. We're not going direct to tier 3 and tier 4 merchants. We're providing our platform to the ISO, the ISVs the acquirers the banks. They then take that they put their own special SaaS on top of it and they bring it to market. It saves them years of development and we operate at scale and security.
So, we are very conscious of channel conflict. We do not compete against our clients. And our solution is open to all acquirers. So, our solution in VeriFone Connect overtime will also be device agnostic and platform agnostic. We really view our business as helping merchants and those that serve those merchants grow, that's what we do, without being a financial institution.
Okay. One super last super quick last one from me is just. Can you overlay that sort of revenue model of Connect on to some of the prior comments you made around the different buckets of revenue? Is this something where there is a subscription need for the service and incremental per transaction type views depending on what the end users signs up to do. Or how does their actual revenue model for Connect work?
Yeah, we chose the simple don't reinvent the wheel approach to pricing. It's subscription, it's got three packages. The standard to premium and the premium plus or as my team likes to called it the good, the better, the best. And it's really meant to provide the acquirer and the ISV with something that is very manageable and curated by them in this payment construct. They continue to receive all of their transaction fees as they have in the past. This just takes it to another level.
Thank you. At this time, I'd like to turn the call back over to Mr. Mammone for any closing remarks. Sir?
I want to thank you. Just a quick announcement, we'll be presenting at the Barclays Emerging Famous Forum next week in New York, as well as the Craig-Hallam Tech Innovators' Conference in Boston. So, hope to see many of you down the road. Thank you.
Thanks everyone. Have a good night.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.