After A Bumpy Two-Year Ride Hypercom's CEO Steps Down

Implications: Implications: Although Hypercom's earnings were up in 1Q07 by 6.3% or $64.8 million, compared to $60.9 million during the same period in 2006, apparently, it wasn't enough progress to woo Hypercom's Board and satisfy its investors. Hypercom has come under immense pressure from its competitors Verifone/Lipman, Ingenico and investors calling for Hypercom to stop focusing on acquisitions and to either implement a major stock buyback or put the company up for sale if profit improvements don't occur before year-end 2007. In a turnaround move Hypercom acquired ACG Group and TPI Software, which resulted in $2.5 million in revenue in 1Q07 and the acquisitions produced higher margins. Hypercom also sold its Phoenix Headquarters and moved to contract manufacturing to benefit from an excess cash flow of approximately $21 million. However, competitive pricing from distributors, processors and ISOs drove down sales in North America, while sales in EMEA, Mexico, Brazil and Asia-Pacific was up.

Analysis: Comments/Perspective:

Hypercom's outgoing CEO received a "special delivery letter" earlier this year from one of its activist investors, RLR Capital Partners, who owns 5% of Hypercom's outstanding shares, imploring the CEO to either merge with another company, buy back shares or consider acquisition. Afterwards, Hypercom conducted a strategic assessment of its global operations and decided to focus on executing their business model of organic growth, improving revenue growth in regions with the highest potential and focusing on technology, innovation of new products and custom components to meet revenue growth targets for 2007.  However, during this same period two other POS terminal manufacturers merged, powerhouses Verifone and Lipman, whose combined earnings in 2006 easily tripled Hypercom's earnings.

1.  To add salt to Hypercom's wounds, Verifone issued a press release urging Hypercom's customers' to jump ship and join Verifone because Hypercom's terminals weren't compliant with PCI Standards (Payments Card Industry Security Standards). To Hypercom's credit, they are setting up hundreds of accounts monthly and plan to roll out a new line of PCI compliant terminals by 3Q07 and their customers are familiar with their equipment, they understand the programming and switching to another type of terminal is just not that easy to do

2.  Hypercom is exploring potential mergers with partners that would complement their business model and product offerings and a merger with Ingenico makes good sense and would position the combined company ahead of Verifone, who is currently the global leader in the industry.   However, in order for Hypercom to successfully compete in the industry they will need to improve their product gross margins, reduce materials costs, strengthen relationships and communication with its customers and shareholders, expand its R&D Operations to launch innovative products in the vertical markets (mobile, contactless and unattended payments) and focus on revenue growth and organic growth, rather than acquisitions

This is the second management shakeup at Hypercom in a two-year period.  Will Keiper came to Hypercom as an interim executive to help restructure the company in 2005 and perhaps the new management will seriously entertain a merger or acquisition.