Verifone's (PAY) fiscal 2016 results reflected the headwinds facing point-of-sale hardware manufacturers and their disadvantages position in the payment ecosystem, as networks extended gas station EMV installation deadlines by a full three years. Furthermore, mobility continues to be a key issue. While Verifone is rolling out hardware for pay-at-the table service in restaurants as well as in other retail environments, this trend will also open up opportunities for competitors. Verifone’s Carbon system, for example, is similar to tablet-based point-of-sale systems offered by multiple competitors, and the company has announced plans to develop a value-priced mobile point-of-sale system in an attempt to win back share from low-cost competitors.

In fact, gross margin is already declining as lower-margin emerging markets continue to make up a growing portion of the business. Macroeconomic troubles in some countries—Mexico and Turkey, for instance—and dollar strength further detracted from fiscal 2016 results. Revenue also declined significantly compared with the end of fiscal 2015, when demand for EMV systems pulled forward shipment volumes. Management plans to offset this trend with expense reductions, and though Verifone maintains significant scale in its space, such improvements will be difficult to maintain.

On the positive side, services revenue expanded by 16% during the year. The more sophisticated, software-focused needs of Verifone customers should provide a healthy runway for such revenue—as will the need for more frequent updates as point-of-sale technology advances. However, the move to payments-as-a-service may be merely cannibalizing hardware revenue over time. Revenue for the year fell slightly as service revenue growth largely offset the decline in hardware sales. Overall, the results--including an $0.08 per share loss for the year--supported our skeptical thesis and we are maintaining our $15 fair value for the no moat company.

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