Hypercom Corporation Announces Third Quarter 2007 Financial Results

Hypercom Corporation (NYSE: HYC), the high security electronic transaction solutions provider, today announced financial results for the three months ended September 30, 2007. Revenue for the third quarter of 2007 was $70.8 million, an increase of $14.1 million or 24.9% compared to $56.7 million of revenue in the same quarter of 2006 and an increase of $3.3 million or 4.9% compared to the second quarter of 2007. The third quarter year over year revenue increase was the result of increased revenue from the South America, Asia-Pacific, Mexico Caribbean and Central America (MCCA), and Europe Middle East and Africa (EMEA) regions, with revenue flat in North America. Product revenues were up in South America, Asia-Pacific, MCCA, and EMEA, but down in North America. Product revenues in Asia-Pacific, MCCA, and EMEA were up due to higher demand for countertop and mobile payment terminals. North American product revenue was lower principally as a result of decreased revenue from one U.S. customer. Service revenues increased in all operating regions, with the largest increase of $4.9 million in the Asia-Pacific region as a result of the acquisition of ACG Group in early 2007. Sequentially, the third quarter revenue growth was attributable to service revenue growth in South America, North America and Asia-Pacific, partially offset by product revenue decreases in the EMEA and MCCA regions. On a year to date basis, revenue is up $19.3 million or 10.5% compared to 2006; product revenue is up $2.8 million or 2.0% and service revenue is up $16.5 million or 39.0%. Product revenue growth from mobile and countertop products has been partially offset by revenue declines in unattended and multi-lane products. The increase in service revenue is primarily related to $13.5 million of incremental revenue from recent acquisitions, as well as a $2.0 million increase in service revenue in Mexico. Gross profit for the third quarter of 2007 was $21.2 million or 30.0% of revenue, compared to third quarter 2006 gross profit of $18.9 million or 33.4% of revenue. Third quarter 2007 gross margin is a blend of 33.3% product gross margin and 22.9% service gross margin compared to margins of 36.5% and 23.4% in third quarter 2006. Product gross margins are lower than in the prior year due to an incremental $3.5 million of slightly negative gross margin countertop products sold in Brazil. Terminals were sold at near cost in Brazil with the expectation that these sales will create returns through contractually recurring service revenues over time. Excluding the impact of Brazil’s negative margin terminal sales in the third quarter of both 2006 and 2007, product margins are unchanged. Sequentially, third quarter 2007 gross margins are up significantly compared to the second quarter of 2007. Second quarter 2007 product and service gross margins were reduced by a variety of charges that were not incurred in the third quarter as well as a significant gross margin decline related to competitive pricing pressures for services in Brazil. Cost restructuring and process improvements have improved the Brazilian service gross margin significantly for the third quarter. On a year to date basis, September 30, 2007 gross profit was $50.7 million or 24.9%, compared to $69.8 million or 38.0% for the same period in 2006. The year to date 2007 gross profit has been reduced by the previously mentioned charges in second quarter 2007 compared to the prior year and the $8.4 million of incremental, slightly negative gross margin revenue related to product sales in Brazil in 2007. Operating expenses for the third quarter of 2007 were $20.7 million, up $2.0 million compared to $18.7 million in the same quarter of 2006, and sequentially up $5.0 million compared to second quarter 2007 expense of $15.7 million. Operating expenses for the third quarter of 2006 included an offsetting gain of $3.0 million on the sale of a building in Asia. The third quarter of 2007 included $0.7 million of incremental due diligence costs. The sequential quarter operating expense increase resulted from offsets to operating expense of $6.1 million in the second quarter related to a gain on the sale of property in Arizona, legal settlement proceeds, and reversed stock compensation expense. Exclusive of the offsetting benefits in the second quarter of 2007, operating expense declined sequentially. This was primarily due to decreasing R&D costs as a result of declining development activities related to the new T4200 product family that has now been launched, as well as cost benefits resulting from prior period restructuring activities that moved some development activities to lower cost geographies. On a year to date basis through September 30, 2007, operating expenses were $59.9 million compared to $62.3 million in the same period of 2006. Current year operating expenses were reduced by $6.1 million of offsets to operating expense compared to the prior year which benefited by only $3.0 million from a one time benefit from a building sale in Asia. Exclusive of the net benefits in both years, operating expenses have increased slightly. Current year operating expense includes $2.7 million of incremental due diligence costs related to the evaluation of strategic proposals. Third quarter 2007 income from continuing operations was $0.4 million or $0.01 per share compared to net income from continuing operations of $0.5 million or $0.01 per share in the same quarter of 2006, and a net loss from continuing operations of $5.7 million or ($0.11) per share in the second quarter of 2007. The second quarter 2007 net loss from continuing operations included the negative impact of $3.4 million of one-time net costs. Balance Sheet and Cash-flow As of September 30, 2007, the Company had $86.4 million of cash and short term investments on hand, up $4.9 million from June 30, 2007. The increase is the result of positive cash flow from operations of $6.0 million, primarily due to a further reduction in inventories. Increased accounts receivable was offset by similar increases in accounts payable and other liabilities. New Initiatives Hypercom has recently announced several new important product releases and certifications, including: The new Optimum T4200 global countertop platform, consisting of six 32-bit, multi-application terminals available in Wireless GSM/GPRS, Ethernet/SSL with dial back up, and dial only models, is PCI PED certified and has achieved EMV Level 1 & 2 certifications making them available to merchants and financial institutions in both US and international markets. The Optimum M4100 "Blade” handheld mobile wireless terminal, the L4100, L4200 and L4250 Optimum multi-lane terminals and the new IP-enabled Optimum T4200 family of countertop terminals have all gained approval under Mastercard’s Worldwide Payment Terminal Security Program that ensures that IP and wireless-based transactions meet the highest levels of security. The PV1310 handheld PIN Pad, a PCI PED certified PIN pad featuring vendor-agnostic architecture, was introduced. The PV1310 enables easy integration with non-Hypercom payment terminals enabling merchants to quickly add high security PCI certified PIN-based payments to their legacy systems without upgrading their entire terminal infrastructure. Third Quarter Earnings Call Hypercom has scheduled its conference call to discuss third quarter 2007 financial results for Thursday, November 1, 2007. The call will be held at 4:30 p.m. ET and will be available either through telephone dial-in or audio web cast. The dial-in number is 1-877-397-0292 for North American callers and +1-719-325-4854 for international callers. There is no access code required for the call. To access the audio web cast, please go to Hypercom’s website, http://ir.hypercom.com at least two minutes prior to the call to register. A replay of the conference call can be accessed approximately one hour after the conclusion of the live call and will be available until Saturday, December 1, 2007. The replay number for North America is 1-888-203-1112 and +1-719-457-0820 for international callers. The replay access code is 2575451. A replay of the call can also be accessed in the "audio archive” section of http://ir.hypercom.com, where it will remain until the next results release. Forward-Looking Statements This press release includes statements that may constitute forward-looking statements that are subject to the safe harbor provisions of the Section 27A of the Securities Act of 1933 and Section 21G of the Securities Exchange Act of 1934. The words "believe,” "expect,” "anticipate,” "estimate,” "will,” "intend,” "project,” and other similar expressions identify such forward-looking statements. These forward-looking statements include, among other things, statements regarding Hypercom’s anticipated financial performance, projections regarding future revenue, gross margins, operating profits, product and service margins, net income, cash flows, gains or losses from discontinued operations, the timing, performance, certifications, and market acceptance of new products, the migration to a contract manufacturer of the Company’s products, the development and success of broader distribution channels, potential acquisitions and business combinations, and the expected results and benefits of such transactions. Readers are cautioned that these forward-looking statements are only predictions and may differ materially from actual future events or results. Readers are referred to documents filed by Hypercom with the Securities and Exchange Commission, specifically the most recent reports on Forms 10-K, 10-Q, and 8-K, each as it may be amended from time to time, which identify important risk factors that could cause actual results to differ from those contained in the forward-looking statements. Among the important factors or risks that could cause actual results to differ from those contained in the forward-looking statements in this press release are: the state of the competition in the payments processing industry in general; the timing and commercial feasibility of new products, services, and market development initiatives; risks relating to the introduction of new products and services including ability to obtain and the timing of key certifications; our ability to cost reduce new and existing products to improve margins; projections regarding specific demand for our products and services; projections regarding future revenues, cost of sales, operating expenses, margins, cash flows, earnings, working capital and liquidity; the adequacy of our current facilities and management systems infrastructure to meet our operational needs; the status of our relationship with and condition of third parties upon whom we rely in the conduct of our business; the challenges presented by conducting business on an international basis; the sufficiency of our reserves for assets and obligations exposed to revaluation; our ability to identify and complete acquisitions, strategic investments, and business combinations and successfully integrate them into our business; the impact of current litigation matters on our business; our ability to effectively hedge our exposure to foreign currency exchange rate fluctuations; risks associated with utilization of contract manufacturers of our products; industry and general economic conditions; and future access to capital on terms that are acceptable, as well as assumptions related to the foregoing. The financial information contained in this press release should be read in conjunction with the consolidated financial statements and notes thereto included in Hypercom’s most recent reports on Form 10-K and 10-Q, each as it may be amended from time to time. Hypercom’s results of operations for the three months ended September 30, 2007 are not necessarily indicative of Hypercom’s operating results for any future periods. Any projections in this press release are based on limited information currently available to Hypercom, which is subject to change. Although any such projections and the factors influencing them will likely change, Hypercom is under no obligation, nor do we intend to, update the information, since Hypercom will only provide guidance at certain points during the year. Such information speaks only as of the date of this press release. Hypercom does not endorse any projections regarding future performance that may be made by third parties. Hypercom and Optimum & Design are registered trademarks of Hypercom Corporation. All other trademarks are the property of their respective owners. HYCF HYPERCOM CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)         Three Months EndedSeptember 30, Nine Months EndedSeptember 30, (Amounts in thousands, except per share data) 2007 2006 2007 2006 Net revenue: Products $ 48,166 $ 43,158 $ 144,199 $ 141,378 Services   22,652     13,511     58,923     42,404   Total net revenue   70,818     56,669     203,122     183,782   Costs of revenue: Products 32,129 27,395 103,171 84,245 Services   17,458     10,352     49,278     29,701   Total costs of revenue   49,587     37,747     152,449     113,946   Gross profit   21,231     18,922     50,673     69,836   Operating expenses: Research and development 6,104 7,049 21,541 19,547 Selling, general and administrative 14,588 14,599 42,115 45,696 Gain on sale of real property   (22 )   (2,958 )   (3,796 )   (2,958 ) Total operating expenses   20,670     18,690     59,860     62,285   Income (loss) from continuing operations 561 232 (9,187 ) 7,551 Interest income, net 1,136 824 2,759 2,516 Foreign currency loss (327 ) (104 ) (1,356 ) (637 ) Other expense   (13 )   (23 )   (7 )   (31 ) Income (loss) before income taxes and discontinued operations 1,357 929 (7,791 ) 9,399 Provision for income taxes   (966 )   (456 )   (737 )   (1,928 ) Income (loss) before discontinued operations 391 473 (8,528 ) 7,471 Income (loss) from discontinued operations   138     (127 )   789     2,241   Net income (loss) $ 529   $ 346   $ (7,739 ) $ 9,712     Basic and Diluted income (loss) per share: Income (loss) before discontinued operations $ 0.01 $ 0.01 $ (0.16 ) $ 0.14 Income from discontinued operations   -     -     0.01     0.04   Basic and diluted income (loss) per share $ 0.01   $ 0.01   $ (0.15 ) $ 0.18     Weighted average common shares: Basic   52,852,410     53,524,064     52,838,846     53,247,041   Diluted   53,023,085     54,161,546     52,838,846     54,066,308   HYPERCOM CORPORATION CONSOLIDATED BALANCE SHEETS       September 30, December 31, (Amounts in thousands) 2007 2006 (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 77,748 $ 34,190 Restricted cash 268 201 Short-term investments 8,388 47,228 Accounts receivable, net 69,083 52,777 Inventories 30,174 52,632 Prepaid expenses and other current assets 11,786 8,001 Deferred tax assets   921   691 Total current assets 198,368 195,720 Property, plant and equipment, net 17,178 27,261 Intangible assets, net 10,920 5,733 Other long-term assets   16,502   8,002 Total assets $ 242,968 $ 236,716   LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 25,942 $ 22,931 Accrued payroll and related expenses 8,813 6,201 Accrued sales and other taxes 8,049 7,781 Product warranty liabilities 2,134 2,636 Accrued other liabilities 14,944 9,603 Deferred revenue 4,196 2,185 Income taxes payable   1,808   2,460 Total current liabilities 65,886 53,797 Deferred tax liabilities, net 644 380 Other long-term liabilities   3,400   3,608 Total liabilities 69,930 57,785 Stockholders' equity   173,038   178,931 Total liabilities and stockholders' equity $ 242,968 $ 236,716 HYPERCOM CORPORATION STATEMENTS OF CASH FLOWS (Unaudited)       Three Months EndedSeptember 30, Nine Months EndedSeptember 30, (Amounts in thousands) 2007 2006 2007 2006   Cash flows from continuing operations: Net income (loss) from continuing operations $ 391 $ 472 $ (8,528 ) $ 7,471 Adjustments to reconcile net income (loss) from continuing operations to net cash provided by (used in) operating activities: Depreciation and amortization 2,305 1,845 6,673 5,682 Amortization of deferred financing costs - - - 4 Amortization of discounts on short-term investments (232 ) (304 ) (785 ) (990 ) Provision for doubtful accounts 248 146 825 615 Provision for excess and obsolete inventory 430 660 7,062 1,630 Provision (benefit) for warranty and other product charges 51 591 1,944 (89 ) Deferred income tax benefit (provision) 36 (78 ) 34 (41 ) Non-cash share-based compensation expense 64 1,810 1,109 4,689 Foreign currency losses (194 ) (179 ) (453 ) (660 ) Gain on sale of real property (22 ) (2,958 ) (3,796 ) (2,958 ) Other non-cash 51 (72 ) 478 264 Changes in operating assets and liabilities, net   2,867     (7,395 )   1,325     (16,208 ) Net cash provided by (used in) operating activities   5,995     (5,462 )   5,888     (591 )   Cash flows from investing activities: Purchase of property, plant and equipment (1,507 ) (1,220 ) (5,319 ) (4,515 ) Proceeds from the sale of real property - 5,190 16,250 5,190 Cash paid for acquisitions, net of cash acquired - - (12,707 ) - Software development costs capitalized (258 ) (286 ) (1,160 ) (787 ) Net increase in restricted cash (11 ) (56 ) (67 ) (189 ) Purchase of short-term investments (28,335 ) (75,695 ) (126,057 ) (228,344 ) Proceeds from the sale or maturity of short-term investments   60,855     98,600     165,690     234,275   Net cash provided by investing activities   30,744     26,533     36,630     5,630     Cash flows from financing activities: Repayments of bank notes payable and other debt instruments - (24 ) (5 ) (8,354 ) Proceeds from issuance of common stock 273 1,999 544 6,393 Purchase of treasury stock   -     (10,069 )   -     (10,740 ) Net cash provided by (used in) financing activities   273     (8,094 )   539     (12,701 ) Effect of exchange rate changes on cash   212     41     507     337   Net increase (decrease) in cash flows from continuing operations 37,224 13,018 43,564 (7,325 ) Net cash provided by (used in) operating activities - discontinued operations (6 ) (405 ) (6 ) 4,192 Net cash provided by investing activities - discontinued operations - - - 12,137 Cash and cash equivalents, beginning of period   40,530     32,331     34,190     35,940   Cash and cash equivalents, end of period $ 77,748   $ 44,944   $ 77,748   $ 44,944