UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended April 30, 2017

Or

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from              to

Commission file number: 001-32465

VERIFONE SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Delaware	04-3692546
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

88 West Plumeria Drive

San Jose, CA 95134

(Address of principal executive offices with zip code)

(408) 232-7800

(Registrant’s telephone number, including area code)

N/A- (Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer  þ	Smaller reporting company  o	Accelerated filer   o
Non-accelerated filer o		Emerging growth company   o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ

The number of shares outstanding of each of the issuer's classes of common stock, as of the close of business on May 31, 2017

Class	Number of shares
Common Stock, $0.01 par value per share	111,835,855

VERIFONE SYSTEMS, INC.

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements:	3
	Condensed Consolidated Statements of Operations	3
	Condensed Consolidated Statements of Comprehensive Income (Loss)	4
	Condensed Consolidated Balance Sheets	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	45
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	46
Item 1A.	Risk Factors	46
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	75
Item 3.	Defaults Upon Senior Securities	75
Item 4.	Mine Safety Disclosures	75
Item 5.	Other Information	75
Item 6.	Exhibits	76
Signatures		77
Exhibit Index		78

2

PART I — FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS (Unaudited)

VERIFONE SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended April 30,						Six Months Ended April 30,
	2017			2016			2017			2016
	(Unaudited, in thousands, except per share data)
Net revenues:
Systems	$	285,675		$	342,443		$	551,076		$	680,035
Services	188,010			183,835			376,480			359,782
Total net revenues	473,685			526,278			927,556			1,039,817
Cost of net revenues:
Systems	176,219			200,544			342,611			395,349
Services	124,705			115,355			240,753			218,804
Total cost of net revenues	300,924			315,899			583,364			614,153
Gross margin	172,761			210,379			344,192			425,664
Operating expenses:
Research and development	51,771			54,120			107,723			105,755
Sales and marketing	50,935			59,040			100,141			114,459
General and administrative	46,755			54,863			97,558			107,288
Restructuring and related charges	68,896			603			70,038			567
Amortization of purchased intangible assets	18,414			21,974			37,177			41,600
Goodwill impairment	17,384			—			17,384			—
Total operating expenses	254,155			190,600			430,021			369,669
Operating income (loss)	(81,394		)	19,779			(85,829		)	55,995
Interest expense, net	(8,185		)	(8,543		)	(16,332		)	(16,847		)
Other income (expense), net	8,796			(4,809		)	6,574			(6,989		)
Income (loss) before income taxes	(80,783		)	6,427			(95,587		)	32,159
Income tax provision	8,882			3,087			11,802			5,086
Consolidated net income (loss)	(89,665		)	3,340			(107,389		)	27,073
Net income (loss) attributable to noncontrolling interests	(398		)	441			(1,499		)	673
Net income (loss) attributable to VeriFone Systems, Inc. stockholders	$	(89,267	)	$	2,899		$	(105,890	)	$	26,400
Net income (loss) per share attributable to VeriFone Systems, Inc. stockholders:
Basic	$	(0.80	)	$	0.03		$	(0.95	)	$	0.24
Diluted	$	(0.80	)	$	0.03		$	(0.95	)	$	0.24
Weighted average number of shares used in computing net income (loss) per share attributable to VeriFone Systems, Inc. stockholders:
Basic	111,688			110,314			111,522			110,808
Diluted	111,688			111,314			111,522			111,889

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

VERIFONE SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

	Three Months Ended April 30,						Six Months Ended April 30,
	2017			2016			2017			2016
	(Unaudited, in thousands)
Consolidated net income (loss)	$	(89,665	)	$	3,340		$	(107,389	)	$	27,073
Other comprehensive income:
Foreign currency translation adjustments, net of tax	11,463			60,279			9,361			22,050
Unrealized gain (loss) on derivatives designated as cash flow hedges
Change in unrealized gain (loss) on derivatives designated as cash flow hedges	513			(374		)	4,372			(2,061		)
Amounts reclassified from Accumulated other comprehensive loss	409			952			1,087			2,114
Tax impact on unrealized gain (loss) on derivatives designated as cash flow hedges	(350		)	—			(2,072		)	—
Net change in unrealized gain (loss) on derivatives designated as cash flow hedges	572			578			3,387			53
Net change in pension plan obligations	28			25			54			51
Other comprehensive income	12,063			60,882			12,802			22,154
Total comprehensive income (loss)	(77,602		)	64,222			(94,587		)	49,227
Less: Comprehensive income (loss) attributable to noncontrolling interests, net of tax	(9,592		)	441			(10,693		)	673
Comprehensive income (loss) attributable to VeriFone Systems, Inc. stockholders	$	(68,010	)	$	63,781		$	(83,894	)	$	48,554

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

VERIFONE SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	April 30, 2017			October 31, 2016
	(Unaudited, in thousands, except par value)
ASSETS
Current assets:
Cash and cash equivalents	$	134,493		$	148,352
Accounts receivable, net of allowances of $13,782 and $14,063, respectively	335,198			323,447
Inventories	141,698			175,231
Prepaid expenses and other current assets	195,158			110,397
Total current assets	806,547			757,427
Property and equipment, net	130,488			202,277
Purchased intangible assets, net	261,379			306,298
Goodwill	1,069,900			1,110,493
Deferred tax assets, net	35,459			36,989
Other long-term assets	100,295			81,323
Total assets	$	2,404,068		$	2,494,807
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	154,940		$	154,574
Accruals and other current liabilities	245,997			213,411
Deferred revenue, net	109,207			104,797
Short-term debt	74,540			66,017
Total current liabilities	584,684			538,799
Long-term deferred revenue, net	69,705			66,516
Deferred tax liabilities, net	100,915			99,371
Long-term debt	803,345			859,896
Other long-term liabilities	68,623			76,840
Total liabilities	1,627,272			1,641,422
Commitments and contingencies
Redeemable noncontrolling interest in subsidiary	1,579			4,980
Stockholders’ equity:
Preferred stock: $0.01 par value, 10,000 shares authorized, no shares issued and outstanding	—			—
Common stock: $0.01 par value, 200,000 shares authorized, 111,826 and 111,261 shares issued and outstanding as of April 30, 2017 and October 31, 2016, respectively	1,118			1,113
Additional paid-in capital	1,792,238			1,771,951
Accumulated deficit	(724,229		)	(618,339		)
Accumulated other comprehensive loss	(318,998		)	(340,994		)
Total VeriFone Systems, Inc. stockholders’ equity	750,129			813,731
Noncontrolling interests in subsidiaries	25,088			34,674
Total equity	775,217			848,405
Total liabilities, redeemable noncontrolling interest in subsidiary and equity	$	2,404,068		$	2,494,807

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

VERIFONE SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six Months Ended April 30,
	2017			2016
	(Unaudited, in thousands)
Cash flows from operating activities
Consolidated net income (loss)	$	(107,389	)	$	27,073
Adjustments to reconcile consolidated net income (loss) to net cash provided by operating activities:
Depreciation and amortization	76,229			85,581
Stock-based compensation expense	20,731			22,039
Deferred income taxes, net	264			(5,103		)
Non-cash restructuring and related charges	39,579			—
Goodwill impairment	17,384			—
Other	5,640			6,227
Net cash provided by operating activities before changes in operating assets and liabilities	52,438			135,817
Changes in operating assets and liabilities:
Accounts receivable, net	(21,483		)	(12,602		)
Inventories	23,763			(23,416		)
Prepaid expenses and other assets	(10,021		)	(21,065		)
Accounts payable	(610		)	26,015
Deferred revenue, net	9,067			30,882
Other current and long-term liabilities	27,078			(18,371		)
Net change in operating assets and liabilities	27,794			(18,557		)
Net cash provided by operating activities	80,232			117,260
Cash flows from investing activities
Capital expenditures	(36,411		)	(58,345		)
Acquisition of businesses, net of cash and cash equivalents acquired	(4,855		)	(169,712		)
Divestiture of businesses	6,492			—
Other investing activities, net	321			83
Net cash used in investing activities	(34,453		)	(227,974		)
Cash flows from financing activities
Proceeds from debt, net of issuance costs	118,676			380,363
Repayments of debt	(173,462		)	(238,616		)
Proceeds from issuance of common stock through employee equity incentive plans	849			2,458
Stock repurchases	—			(79,866		)
Other financing activities, net	(3,498		)	(3,389		)
Net cash provided by (used in) financing activities	(57,435		)	60,950
Effect of foreign currency exchange rate changes on cash, cash equivalents and restricted cash	1,056			1,060
Net decrease in cash, cash equivalents and restricted cash	(10,600		)	(48,704		)
Cash, cash equivalents and restricted cash, beginning of period	159,181			215,869
Cash, cash equivalents and restricted cash, end of period	$	148,581		$	167,165

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

VERIFONE SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Unaudited

Note 1. Principles of Consolidation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of VeriFone Systems, Inc. and our wholly-owned and majority-owned subsidiaries, including a variable interest entity where we are deemed to be the primary beneficiary, and have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions on Form 10-Q pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. The Condensed Consolidated Balance Sheet at October 31, 2016 has been derived from the audited Consolidated Balance Sheet at that date. All significant inter-company accounts and transactions have been eliminated. In accordance with these rules and regulations, we have omitted certain information and notes normally provided in our annual consolidated financial statements. In the opinion of management, the unaudited Condensed Consolidated Financial Statements contain all adjustments, consisting only of normal recurring items, necessary for the fair presentation of our financial position and results of operations for the interim periods. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2016. The results of operations for the three and six months ended April 30, 2017 are not necessarily indicative of the results expected for the entire fiscal year.

We have two operating segments: Verifone Systems and Verifone Services. Verifone Systems delivers point of sale electronic payment devices that run our unique operating systems, security and encryption software and certified payment software for both payments and commerce. Verifone Services delivers device related services and maintenance, payment transaction routing and reporting, and commerce based services. Our reportable segments are the same as our operating segments.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions about future events that affect the amounts reported in our consolidated financial statements and accompanying notes. We evaluate our estimates on an ongoing basis when updated information related to such estimates becomes available. We base our estimates on historical experience and information available to us at the time these estimates are made. Actual results could differ materially from these estimates.

Significant Accounting Policies

During the three and six months ended April 30, 2017, there have been no changes in our significant accounting policies as described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2016, except as follows:

Equity Method Investments

Equity investments are accounted for under the equity method if we are able to exert significant influence over the investee company but do not have a controlling financial interest. Equity method investments, which are initially recorded at fair value and are adjusted for our proportionate share of the earnings and losses of the equity method investee, are included in Other long-term assets in our Consolidated Balance Sheets. Earnings and losses of equity method investments are based on the most recently available financial statements of the investee and are included in Other income (expense), net in our Consolidated Statements of Operations. Basis differences between the cost of an equity method investment and the underlying equity in the long-lived assets are amortized over the estimated economic useful life of the underlying long-lived asset. We periodically review our equity method investments for impairment and record a reduction in the carrying value, if and when necessary.

7

VERIFONE SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Concentrations of Credit Risk

For the three and six months ended April 30, 2017 and 2016, no single customer accounted for more than 10% of our total Net revenues. As of April 30, 2017 and October 31, 2016, no single customer accounted for more than 10% of our total Accounts receivable, net.

Recently Adopted Accounting Pronouncements

During August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We adopted ASU 2016-15 retrospectively, effective November 1, 2016. Adoption had no impact on our consolidated statements of cash flows in any periods presented.

During November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows - Restricted Cash, which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We adopted ASU 2016-18 retrospectively, effective November 1, 2016. Restricted cash is now included as a component of Cash, cash equivalents and restricted cash on our Consolidated Statements of Cash Flows for all periods presented.

During January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The standard is effective for annual or interim impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We adopted this standard in connection with the goodwill impairment assessment of our Taxi Solutions reporting unit during the three months ended April 30, 2017. See Note 7, Goodwill and Purchased Intangible Assets for additional information.

Recent Accounting Pronouncements Not Yet Adopted

During May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, as amended by ASU 2015-14, 2016-08, 2016-10, and 2016-12, which provides new guidance on the recognition of revenue and states that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted as of reporting periods beginning after December 15, 2016. We expect to adopt ASU 2014-09 effective in the first interim period of our fiscal year ending October 31, 2019 and are currently evaluating the transition method we will use. We expect this standard to impact our consolidated financial position and results of operations, and are in the process of quantifying the materiality of the impact.

During January 2017, the FASB issued ASU 2017-01, Business Combinations - Clarifying the Definition of a Business, which provides new guidance to assist entities with evaluating when a set of transferred assets and activities is a business. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted in certain circumstances. We are currently in the process of evaluating our adoption timing and the impact of this new pronouncement on our consolidated financial position and results of operations.

8

VERIFONE SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

During March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which provides guidance to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We are currently in the process of evaluating our adoption timing and the impact of this new pronouncement on our consolidated financial position and results of operations.

During May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation - Scope of Modification Accounting, which provides guidance that clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted for any interim and annual financial statements that have not yet been issued. We are currently in the process of evaluating our adoption timing and the impact of this new pronouncement on our consolidated financial position and results of operations.

Note 2. Business Combinations

Fiscal year 2017 Acquisitions

On April 7, 2017, we entered into an exchange transaction with DMI Parent, DMI Holdings and Gas Media under which we contributed certain assets, consisting of customer contracts associated with our business of marketing, promoting, selling and distributing media and advertising solutions for display or use in petroleum forecourts in the United States, in exchange for a 50% equity interest in Gas Media, and DMI Parent contributed 100% of its equity interest in DMI Holdings in exchange for a 50% equity interest in Gas Media. Gas Media will be operated by DMI Parent and Verifone, but is not jointly controlled by both parties. In connection with the exchange transaction, we have agreed to guarantee, in certain circumstances, up to $12.5 million out of a total of $83.8 million of debt issued to Gas Media.

Our investment in Gas Media is accounted for as an equity method investment and was valued at $18.7 million as of April 7, 2017 and the debt guarantee was deemed to have a nominal value. We have used the income approach to determine the fair value of our investment in Gas Media. The income approach calculates fair value by discounting estimated after-tax cash flows to a present value, using a risk-adjusted discount rate. We used this method in conducting our fair value assessments for this investment because we believe it most appropriately measures the fair value of this income producing asset. Our investment is classified as Level 3 because we use significant unobservable inputs to determine the expected cash flows and an appropriate discount rate to calculate the fair value. The significant unobservable inputs we use to value the Gas Media investment include our estimate of the future expected cash flows and terminal value growth rates of the Gas Media business. The discount rate used to determine the fair value of this investment is 18.5%.

Upon close of this exchange transaction, we recorded a gain of $9.6 million that is included in Other Income (Expenses), Net in the Consolidated Statements of Operations. The gain was determined as the excess of the fair value of Verifone’s 50% equity interest in Gas Media over the carrying value of the contributed assets, including allocated goodwill.

We have made the election to use a one-month lag to record our share of Gas Media results. Accordingly, during the three and six month periods ended April 30, 2017, we did not record any earnings or losses associated with Gas Media's results of operations.

Note 3. Net Income (loss) per Share of Common Stock

Basic net income (loss) per share of common stock is computed by dividing net income (loss) attributable to VeriFone Systems, Inc. stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted net income (loss) per share of common stock is computed using the weighted average number of shares of common stock outstanding plus the effect of common stock equivalents, unless the common stock equivalents are anti-dilutive. The potential dilutive shares of our common stock resulting from assumed exercises of equity related instruments are determined using the treasury stock method. Under the treasury stock method, an increase in the fair market value of our common stock will result in a greater number of dilutive securities.

9

VERIFONE SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table presents the computation of net income (loss) per share of common stock (in thousands, except per share data):

	Three Months Ended April 30,					Six Months Ended April 30,
	2017			2016		2017			2016
Basic and diluted net income (loss) per share attributable to VeriFone Systems, Inc. stockholders:
Numerator:
Net income (loss) attributable to VeriFone Systems, Inc. stockholders	$	(89,267	)	$	2,899	$	(105,890	)	$	26,400
Denominator:
Weighted average shares attributable to VeriFone Systems, Inc. stockholders - basic	111,688			110,314		111,522			110,808
Weighted average effect of dilutive stock options, RSUs and RSAs	—			1,000		—			1,081
Weighted average shares attributable to VeriFone Systems, Inc. stockholders - diluted	111,688			111,314		111,522			111,889
Net income (loss) per share attributable to VeriFone Systems, Inc. stockholders:
Basic	$	(0.80	)	$	0.03	$	(0.95	)	$	0.24
Diluted	$	(0.80	)	$	0.03	$	(0.95	)	$	0.24

For both the three and six months ended April 30, 2017, equity incentive awards representing 7.7 million shares of common stock, respectively, were excluded from the calculation of weighted average shares for diluted net loss per share as they were anti-dilutive. For both the three and six months ended April 30, 2016, equity incentive awards representing 2.6 million shares of common stock were excluded from the calculation of weighted average shares for diluted net income per share as they were anti-dilutive. Anti-dilutive awards, which include stock options, RSUs and RSAs, could impact future calculations of diluted net income per share if the fair market value of our common stock increases.

For the six months ended April 30, 2016, we repurchased approximately 2.6 million shares of our common stock on the open market at an average repurchase price of $28.02 per share pursuant to a stock repurchase program authorized by our Board of Directors in September 2015. No shares were repurchased during the six months ended April 30, 2017.

Note 4. Income Taxes

We recorded tax provisions totaling $8.9 million and $3.1 million for the three months ended April 30, 2017 and 2016, respectively. The income tax provision for the three months ended April 30, 2017 was primarily related to foreign taxes and discrete items associated with restructuring related charges. The income tax provision for the three months ended April 30, 2016 was primarily related to foreign taxes, which were partially offset by the reversal of unrecognized tax benefits where statute of limitations expired or audits have been settled. We recorded tax provisions totaling $11.8 million and $5.1 million for the six months ended April 30, 2017 and 2016, respectively, which primarily related to foreign taxes partially offset by the reversal of unrecognized tax benefits where statute of limitations expired or audits have been settled.

Our total unrecognized tax benefits were approximately $107.4 million as of April 30, 2017. The amount of unrecognized tax benefits could be reduced upon closure of tax examinations or if the statute of limitations on certain tax filings expires without assessment from the relevant tax authorities. We believe that it is reasonably possible that there could be an immaterial reduction in unrecognized tax benefits due to statute of limitation expirations in multiple tax jurisdictions during the next 12 months. Interest and penalties accrued on these uncertain tax positions will also be released upon the expiration of the applicable statute of limitations.

10

VERIFONE SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Israel Tax Audit Assessment

We are currently under audit by the Israeli Tax Authorities for fiscal years 2008 through 2009 and 2011 through 2013. The Israeli Tax Authorities issued a tax assessment in October 2014 for fiscal year 2009 or alternatively for fiscal year 2008 claiming there was a business restructuring that resulted in a transfer of some functions, assets and risks from VeriFone Israel Ltd. to the U.S. parent company that the Israeli Tax Authorities claim was a sale valued at 1.36 billion New Israeli Shekels(approximately $374.6 million at the foreign exchange rate as of April 30, 2017). We filed our objection to the tax assessment in January 2015 and received the Israeli Tax Authorities decision through an Order (a second stage assessment) in January 2016. The Order increased the value of the sale to 2.20 billion New Israeli Shekels in fiscal year 2009 (approximately $605.5 million at the foreign exchange rate as of April 30, 2017) or alternatively 2.23 billion New Israeli Shekels in fiscal year 2008 (approximately $612.5 million at the foreign exchange rate as of April 30, 2017) and contended secondary adjustments relating to a deemed dividend and/or interest.

Based on the Order, these and other claims result in a tax liability and deficiency penalty assessment in the amount of 1.30 billion New Israeli Shekels (approximately $357.0 million at the foreign exchange rate as of April 30, 2017), if the claim was assessed for fiscal year 2009, to 1.54 billion New Israeli Shekels (approximately $422.9 million at the foreign exchange rate as of April 30, 2017) if the claim was assessed for fiscal year 2008, including interest, the required Israeli price index adjustments (referred to as the linkage differentials) and deficiency fines (as applicable) through April 30, 2017. The Israeli Tax Authorities' contention regarding secondary adjustments relating to deemed dividend was not quantified by them.

We continue to believe the Israeli Tax Authorities' assessment position is without merit and appealed the assessment to the district court. We have agreed with the Israeli Tax Authorities to repay our $69.0 million intercompany loan from VeriFone Israel Ltd. to the extent of the amount of a final agreed tax assessment concerning fiscal year 2008 and fiscal year 2009 or a judgment of a district court in an appeal on the decision of the Israeli Tax Authorities in the objection, if any.

Other Audits

We have certain other foreign subsidiaries under audit by foreign tax authorities, including Brazil for 2002, India for fiscal years 2008 to 2015 and New Zealand for fiscal years 2014 and 2015. Although we believe we have appropriately provided for income taxes for the years subject to audit, the Brazil, India, Israel and New Zealand taxing authorities may adopt different interpretations. We have not yet received any final determinations with respect to these audits. We have accrued tax liabilities associated with these audits. With few exceptions, we are no longer subject to tax examination for periods prior to 2008.

Note 5. Balance Sheet and Statement of Operations Components

Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash shown in the Consolidated Statements of Cash Flows (in thousands):

	April 30, 2017		October 31, 2016
Cash and cash equivalents	$	134,493	$	148,352
Restricted cash included in Prepaid expenses and other current assets	12,507		9,008
Restricted cash included in Other long-term assets	1,581		1,821
Cash, cash equivalents and restricted cash	$	148,581	$	159,181

Restricted cash as of April 30, 2017 and October 31, 2016 was mainly comprised of pledged deposits.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Inventories

Inventories consisted of the following (in thousands):

	April 30, 2017		October 31, 2016
Raw materials	$	32,425	$	35,453
Work-in-process	1,965		3,884
Finished goods	107,308		135,894
Total inventories	$	141,698	$	175,231

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following (in thousands):

	April 30, 2017		October 31, 2016
Assets held for sale	$	93,967	$	5,131
Prepaid expenses	47,838		46,240
Other current assets	53,353		59,026
Total prepaid expenses and other current assets	$	195,158	$	110,397

Assets held for sale relate to our Taxi Solutions and petroleum media businesses. See Note 9, Restructurings and Related Charges, for additional information. Other current assets were comprised primarily of prepaid taxes and restricted cash.

Property and Equipment, Net

Property and equipment, net consisted of the following (in thousands):

	Estimated Useful Life (Years)	April 30, 2017			October 31, 2016
Revenue generating assets	5	$	131,282		$	209,725
Computer hardware and software	3-5	108,988			112,984
Machinery and equipment	3-10	47,077			57,020
Leasehold improvements	Lesser of the term of the lease or the estimated useful life	30,721			31,328
Office equipment, furniture, and fixtures	3-5	19,204			18,573
Buildings	40-50	6,041			6,011
Total depreciable property and equipment, at cost		343,313			435,641
Accumulated depreciation		(218,905		)	(243,127		)
Depreciable property and equipment, net		124,408			192,514
Construction in progress		4,909			8,600
Land		1,171			1,163
Total property and equipment, net		$	130,488		$	202,277

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Accruals and Other Current Liabilities

Accruals and other current liabilities consisted of the following (in thousands):

	April 30, 2017		October 31, 2016
Accrued expenses	$	91,118	$	76,187
Accrued compensation	58,757		52,555
Other current liabilities	96,122		84,669
Total accruals and other current liabilities	$	245,997	$	213,411

Other current liabilities were comprised primarily of liabilities held for sale, accrued warranty, sales and value-added taxes payable, accrued restructuring expenses and customer deposits.

Accrued Warranty

Activity related to accrued warranty consisted of the following (in thousands):

	Six Months Ended April 30,
	2017			2016
Balance at beginning of period	$	16,656		$	16,320
Warranty charged to Cost of net revenues	7,278			7,156
Utilization of warranty accrual	(6,393		)	(7,348		)
Other	(18		)	124
Balance at end of period	17,523			16,252
Less: current portion	(15,203		)	(12,918		)
Long-term portion	$	2,320		$	3,334

Deferred Revenue, Net

Deferred revenue, net of related costs consisted of the following (in thousands):

	April 30, 2017			October 31, 2016
Deferred revenue	$	192,075		$	185,788
Deferred cost of revenue	(13,163		)	(14,475		)
Deferred revenue, net	178,912			171,313
Less: current portion	(109,207		)	(104,797		)
Long-term portion	$	69,705		$	66,516

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Stock-Based Compensation Expense

The following table presents the stock-based compensation expense recognized in our Condensed Consolidated Statements of Operations (in thousands):

	Three Months Ended April 30,				Six Months Ended April 30,
	2017		2016		2017		2016
Cost of net revenues	$	1,125	$	880	$	2,055	$	1,692
Research and development	1,831		1,886		3,399		3,794
Sales and marketing	3,244		3,840		5,831		7,099
General and administrative	4,978		4,973		9,446		9,454
Total stock-based compensation expense	$	11,178	$	11,579	$	20,731	$	22,039

Accumulated Other Comprehensive Loss

Activity related to Accumulated other comprehensive loss consisted of the following (in thousands):

	Foreign currency translation adjustments (1)			Unrealized gain (loss) on derivatives designated as cash flow hedges (2)			Adjustment of pension plan obligations (3)			Total
Balance at October 31, 2016	$	(333,280	)	$	(2,419	)	$	(5,295	)	$	(340,994	)
Gains before reclassifications	9,485			4,372			—			13,857
Amounts reclassified from Accumulated other comprehensive loss	9,194			1,087			54			10,335
Tax effect	(124		)	(2,072		)	—			(2,196		)
Other comprehensive income	18,555			3,387			54			21,996
Balance at April 30, 2017	$	(314,725	)	$	968		$	(5,241	)	$	(318,998	)

(1) Amounts reclassified from Accumulated other comprehensive loss were recorded in Redeemable noncontrolling interest in subsidiary and Noncontrolling interests in subsidiaries in the Consolidated Balance Sheets.

(2) Amounts reclassified from Accumulated other comprehensive loss were recorded in Interest expense, net in the Consolidated Statements of Operations.

(3) Amounts reclassified from Accumulated other comprehensive loss, net of tax, were recorded in General and administrative expenses in the Consolidated Statements of Operations. The related tax impacts were insignificant.

Note 6. Financial Instruments

Fair Value Measurements

Our financial assets and liabilities consist principally of cash, accounts receivable, accounts payable, debt, foreign exchange forward contracts, interest rate swaps and contingent consideration payable. The estimated fair value of cash, accounts receivable and accounts payable approximates their carrying value. The estimated fair value of our debt approximates the carrying value because the interest rate on such debt adjusts to market rates on a periodic basis. Assets held for sale, foreign exchange forward contracts, interest rate swaps and contingent consideration payable are recorded at estimated fair value.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

During the six months ended April 30, 2017, there was no material change in the items we measure and record at fair value on a recurring basis. Additionally, there were no transfers between levels of the fair value hierarchy in the six months ended April 30, 2017.

Fair Value of Contingent Consideration Payable

The fair value of contingent consideration payable totaled $1.2 million at April 30, 2017 and $6.0 million at October 31, 2016, and is comprised of amounts payable related to acquisitions. We evaluate changes in the assumptions used to calculate the fair value of contingent consideration payable at the end of each period. The maximum liability on contingent consideration payable is indeterminate because it is based on contributions from the acquired businesses.

See Note 9, Restructurings and Related Charges, for information regarding assets measured and recorded at fair value on a non-recurring basis.

Derivative Financial Instruments

Interest Rate Swap Agreements Designated as Cash Flow Hedges

We use interest rate swap agreements to hedge the variability in cash flows related to interest payments. As of April 30, 2017, we have outstanding interest rate swap agreements to effectively convert $450.0 million of the term A loan from a floating rate plus applicable margin to a fixed rate of 1.20% plus applicable margin through March 30, 2018. The principal amount under the term A loan covered by the interest rate swap agreements will decrease to $400.0 million from October 1, 2017 through March 30, 2018. In addition, we have an outstanding interest rate swap agreement to effectively convert $350.0 million of the term A loan to a fixed rate of 0.975% plus applicable margin from March 30, 2018 through June 30, 2019.

The interest rate swaps qualify for hedge accounting treatment as cash flow hedges. The notional amounts of interest rate swap agreements outstanding as of April 30, 2017 and October 31, 2016 were $450.0 million and $500.0 million, respectively.

Foreign Exchange Forward Contracts Not Designated as Hedging Instruments

We arrange and maintain foreign currency exchange forward contracts so as to yield gains or losses to offset changes in foreign currency denominated assets or liabilities due to changes in foreign exchange rates, with the objective to mitigate the volatility associated with foreign currency transaction gains or losses. Our foreign currency exposures are predominantly inter-company receivables and payables arising from product sales and loans from one of our entities to another. Our foreign exchange forward contracts generally mature within 90 days. The notional amounts of such contracts outstanding as of April 30, 2017 and October 31, 2016 were $246.7 million and $175.0 million, respectively. Gains and losses on foreign exchange forward contracts not designated as hedging instruments for the three and six months ended April 30, 2017 were not material.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 7. Goodwill and Purchased Intangible Assets

Goodwill

Activity related to goodwill by reportable segment consisted of the following (in thousands):

	Verifone Systems		Verifone Services			Total
Balance at October 31, 2016	$	497,126	$	613,367		$	1,110,493
Additions	—		5,529			$	5,529
Disposals	—		(10,096		)	(10,096		)
Reclassification to assets held for sale	—		(28,327		)	(28,327		)
Goodwill impairment	—		(17,384		)	(17,384		)
Currency translation adjustments	4,057		5,628			9,685
Balance at April 30, 2017	$	501,183	$	568,717		$	1,069,900

Goodwill disposed and reclassified to assets held for sale relates to the exit from our petroleum media business and decision to sell our Taxi Solutions reporting unit. See Note 9, Restructurings and Related Charges, for additional information.

Goodwill is not amortized. We review goodwill for impairment annually and whenever events or changes in circumstances indicate its carrying amount may not be recoverable. During the second quarter of fiscal year 2017, management concluded that the carrying amount of the goodwill related to our Taxi Solutions reporting unit may not be recoverable. Based on a quantitative assessment, considering potential sales transactions, management determined the fair value of the reporting unit and concluded that the goodwill was impaired by $17.4 million. There were no indicators of impairment for our Verifone Systems and Verifone Payment Services reporting units during the six months ended April 30, 2017.

Purchased Intangible Assets, Net

Purchased Intangible assets, net consisted of the following (in thousands):

	April 30, 2017							October 31, 2016
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Customer relationships	$	514,230	$	(278,292	)	$	235,938	$	521,964	$	(249,513	)	$	272,451
Other	46,656		(21,215		)	25,441		73,175		(39,328		)	33,847
Total	$	560,886	$	(299,507	)	$	261,379	$	595,139	$	(288,841	)	$	306,298

Other intangible assets, net, were comprised primarily of developed and core technology.

When purchased intangible assets reach the end of their useful lives, gross carrying amount and accumulated amortization are offset. During the six months ended April 30, 2017, we offset $26.4 million of Gross carrying amount and Accumulated amortization of intangible assets, because they reached the end of their useful lives.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Amortization of purchased intangible assets was allocated as follows (in thousands):

	Three Months Ended April 30,				Six Months Ended April 30,
	2017		2016		2017		2016
Included in Cost of net revenues	$	1,629	$	3,820	$	4,074	$	7,809
Included in Operating expenses	18,414		21,974		37,177		41,600
Total amortization of purchased intangible assets	$	20,043	$	25,794	$	41,251	$	49,409

Total future amortization expense for purchased intangible assets that have finite lives, based on our existing intangible assets and their current estimated useful lives as of April 30, 2017, is estimated as follows (in thousands):

	Cost of Net Revenues		Operating Expenses		Total
Fiscal Years Ending October 31:
Remaining of fiscal year 2017	$	3,111	$	30,797	$	33,908
2018	5,396		55,027		60,423
2019	5,274		49,552		54,826
2020	3,605		41,906		45,511
2021	2,456		30,547		33,003
Thereafter	1,041		32,667		33,708
Total future amortization expense	$	20,883	$	240,496	$	261,379

Note 8. Debt

Amounts outstanding under our financing arrangements consisted of the following (in thousands):

	April 30, 2017			October 31, 2016
Credit Agreement
Term A loan	$	495,000		$	525,000
Term B loan	194,500			195,500
Revolving loan	179,421			204,684
Capital leases and other debt	17,801			11,573
Total principal payments due	886,722			936,757
Less: original issue discount and debt issuance costs	(8,837		)	(10,844		)
Total amounts outstanding	877,885			925,913
Less: current portion	(74,540		)	(66,017		)
Long-term portion	$	803,345		$	859,896

Credit Agreement

Key terms of our credit agreement include financial maintenance covenants and certain representations, warranties, covenants and conditions that are customarily required for similar financings. We complied with all financial covenants under our credit agreement as of April 30, 2017.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Borrowings under the credit agreement may be “Base Rate Borrowings” or “Eurodollar Borrowings” at our option. As of April 30, 2017, we have elected the Eurodollar option for all of our borrowings. Eurodollar loans bear interest at a monthly market interest rate plus a margin according to the credit agreement. As of April 30, 2017, the monthly market interest rate was 1.00% for our term A and revolver loans, and 1.00% for our term B loan, and the margins were 2.00% for our term A and revolver loans and 2.75% for our term B loan. Accordingly, as of April 30, 2017, the interest rate was 3.00% for the term A and revolving loans and 3.75% for the term B loan.

We have a number of interest rate swap agreements under which we currently pay banks a fixed rate of 1.20% and receive a monthly floating rate, which effectively converts $450.0 million of the term A loan from a floating interest rate to a fixed interest rate as of April 30, 2017. See Note 6, Financial Instruments for additional information.

As of April 30, 2017, the commitment fee for the unused portion of the revolving loan was 0.25% per annum, payable quarterly in arrears, and the amount available to draw under the revolving loan was $320.6 million.

Note 9. Restructuring and Related Charges

As part of cost optimization and corporate transformation initiatives, our management has approved, committed to and initiated various restructuring plans to reduce headcount, exit under-performing businesses, and consolidate facilities and data centers.

Activity related to our restructuring plan accruals for the six months ended April 30, 2017 consisted of the following (in thousands):

	Restructuring Plans
	June 2014 Plan			July 2015 Plan			June 2016 Plan
	Employee Involuntary Termination Benefits			Employee Involuntary Termination Benefits			Employee Involuntary Termination Benefits			Facilities Related Costs			Total
Balance at October 31, 2016	$	997		$	703		$	5,225		$	2,807		$	9,732
Charges, net of adjustments	(566		)	161			7,218			(1,208		)	5,605
Cash payments	(15		)	(619		)	(6,082		)	(481		)	(7,197		)
Balance at April 30, 2017	$	416		$	245		$	6,361		$	1,118		$	8,140
Cumulative costs to date	$	12,206		$	6,783		$	19,125		$	2,222

Activities under these plans are expected to be substantially complete by the end of fiscal year 2017.

Restructuring charges, net of adjustments were allocated as follows (in thousands):

	Three Months Ended April 30,					Six Months Ended April 30,
	2017		2016			2017		2016
Included in Cost of net revenues	$	956	$	(28	)	$	1,713	$	(89	)
Included in Operating expenses	2,242		603			3,892		567
Total restructuring charges, net of adjustments	$	3,198	$	575		$	5,605	$	478

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VERIFONE SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

During March 2017, our management committed to a plan to exit our petroleum media business, which was part of our Verifone Services segment. In connection with this decision, we have contributed certain assets to Gas Media and are in the process of terminating certain customer agreements. As of April 30, 2017, we have classified the remaining assets of this business as held for sale and recorded a $49.1 million write-down to reflect these assets at fair value, of which $10.6 million is included in Cost of net revenues and $38.5 million is included in Restructuring and related charges in the Consolidated Statements of Operations. The fair value was determined based upon the value at which the assets are being offered to customers in connection with the termination of the associated customer agreements. Additionally, we recorded a $28.1 million accrual for future obligations associated with the terminated customer agreements, which is presented in Other Current Liabilities in the Condensed Consolidated Balance Sheet as of April 30, 2017.

During March 2017, our management committed to a plan to sell our Taxi Solutions reporting unit. As of April 30, 2017, we have classified the net assets and liabilities of this business, including Accounts receivable, Prepaid expenses and other current assets, Fixed Assets, Goodwill and Accruals and other current liabilities, as held for sale. The fair value of these net assets and liabilities was determined in connection with the quantitative assessment of goodwill impairment discussed in Note 7, Goodwill and Purchased Intangible Assets. The gross assets held for sale are presented in Prepaid expenses and other current assets in the Condensed Consolidated Balance Sheet and the gross liabilities held for sale are presented in Accruals and other current liabilities in the Condensed Consolidated Balance Sheet.

Businesses that we have disposed or are committed to sell incurred losses totaling $91.4 million and $98.8 million for the three and six months ended April 30, 2017, respectively, which include the goodwill $17.4 million goodwill impairment, $28.1 million accrual for future obligations associated with terminated customer agreements, $49.1 million write-down to reflect assets held for sale at fair value and $9.6 million gain on Gas Media exchange transaction. Losses for the three and six months ended April 30, 2016 totaled $12.3 million and $19.3 million, respectively.

Note 10. Commitments and Contingencies

Commitments

On April 3, 2017, to lock in pricing on certain components, we committed to purchase $144 million of such components over a four year period, $36 million per year, from one of our existing suppliers. As of April 30, 2017 our remaining non-cancelable commitment under this agreement totaled $124.4 million. Other than this arrangement, there have been no material changes to our non-cancelable operating lease commitments and manufacturing agreements since October 31, 2016.

Bank Guarantees

We have arranged bank guarantees with maturities ranging from two months to eight years to certain of our customers and vendors as required in some countries to support certain performance obligations under our service or other agreements with those parties. As of April 30, 2017, the maximum amount that may become payable under these guarantees was $16.2 million, of which $2.3 million was collateralized by restricted cash deposits.

In addition, in connection with our investment in Gas Station TV we have agreed to guarantee, in certain circumstances, up to $12.5 million of debt issued to Gas Media. As of April 30, 2017, we have not provided any funding under this guarantee.

19

VERIFONE SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Contingencies

We evaluate the circumstances regarding outstanding and potential litigation and other contingencies on a quarterly basis to determine whether there is at least a reasonable possibility that a loss exists requiring accrual or disclosure, and if so, whether an estimate of the possible loss or range of loss can be made, or whether such an estimate cannot be made. When a loss is probable and reasonably estimable, we accrue for such amount based on our estimate of the probable loss considering information available at the time. When a loss is reasonably possible, we disclose the estimated possible loss or range of loss in excess of amounts accrued, if material. Except as otherwise disclosed below, we do not believe that material losses were probable or that there was a reasonable possibility that a material loss may have been incurred with respect to the matters disclosed.

Brazilian Tax Assessments

State Value-Added Tax

The Brazilian subsidiary we acquired as part of our acquisition of Hypercom in August 2011 received an unfavorable administrative decision on a tax enforcement action against it filed by the São Paulo State Revenue Department for collection of state sales taxes related to purported sales of software for the 1998 and 1999 tax years. In 2004, an appeal against this unfavorable administrative decision was filed in a judicial proceeding. The first level decision in the judicial proceeding was issued in our favor. The São Paulo State Revenue Department filed an appeal of this decision. The second level administrative decision ordered that the case be returned to the lower court in order to allow the production of further evidence. Based on our current understanding of the underlying facts of this matter, we believe it is reasonably possible that we may receive an unfavorable decision in this proceeding. The tax assessment including estimated interest through April 30, 2017 for this matter totals approximately 9.2 million Brazilian reais (approximately $2.9 million at the foreign exchange rate as of April 30, 2017). As of April 30, 2017, we have not accrued for this matter, but we have posted a bank bond as a guaranty.

Municipality Services Tax Assessments

In December 2009, one of the Brazilian subsidiaries that was acquired as part of the Lipman acquisition was notified of a tax assessment regarding alleged nonpayment of tax on services rendered for the period from September 2004 to December 2004. This assessment was issued by the municipality of São Paulo (the "municipality") and asserts a services tax deficiency and related penalties totaling 875,000 Brazilian reais (approximately $280,000 at the foreign exchange rate as of April 30, 2017), excluding interest. The municipality claims that the Brazilian subsidiary rendered certain services within the municipality of São Paulo but simulated that those services were rendered in another city. At the end of December 2010 the municipality issued further tax assessments alleging the same claims for 2005 through June 2007. These additional subsequent claims assert services tax deficiencies and related penalties totaling 5.9 million Brazilian reais (approximately $1.8 million at the foreign exchange rate as of April 30, 2017), excluding interest. We received unfavorable decisions from the administrative courts, which ruled to maintain the tax assessments for each of these matters. No further grounds of appeal are available to us for these assessments within the administrative courts. In October 2012, as a result of the decision at the administrative level, the tax authorities filed an enforcement action in the civil courts to collect on the services tax assessments amounts awarded by the administrative court and seeking other related costs and fees. On March 6, 2013, we filed our defensive claims in the civil courts in response to the tax authorities' enforcement action. In February 2013 the tax authorities filed an additional enforcement action in the civil courts to collect on the penalties related to the services tax assessments amounts awarded by the administrative courts. Based on our understanding of the underlying facts of this matter and our evaluation of the potential outcome at the judicial level, we believe it is reasonably possible that our Brazilian subsidiary will be required to pay some amount of the alleged tax assessments and penalties related to these matters, as well as amounts of interest and certain costs and fees imposed by the court related thereto. As of April 30, 2017, the amount of the alleged tax assessments and penalties related to these matters was approximately 25.9 million Brazilian reais (approximately $8.1 million at the foreign exchange rate as of April 30, 2017), including interest, costs and fees related thereto.

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VERIFONE SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Brazilian subsidiary we acquired as part of our acquisition of Hypercom in August 2011 received an unfavorable administrative decision on a tax enforcement action against it filed by the municipality of Curitiba for collection of alleged services tax deficiency. An appeal against this unfavorable administrative decision was filed in a judicial proceeding and currently the case is pending the municipality of Curitiba's compliance with the writ of summons. As of April 30, 2017, the underlying assessment, including estimated interest, was approximately 5.9 million Brazilian reais (approximately $1.8 million at the foreign exchange rate as of April 30, 2017). Based on our current understanding of the underlying facts of this matter, we believe it is reasonably possible that we may receive an unfavorable decision in this proceeding.

Israel Securities Class Actions

On January 27, 2008, a class action complaint was filed against us in the Central District Court in Tel Aviv, Israel on behalf of purchasers of our stock on the Tel Aviv Stock Exchange. The complaint sought compensation for damages allegedly incurred by the class of plaintiffs due to the publication of erroneous financial reports. On April 2, 2015, the Israeli Supreme Court ruled that the applicable law is U.S. law and dismissed this action as estopped by settlement of the similar consolidated federal securities class action in the U.S. (In re VeriFone Holdings, Inc., previously reported).The plaintiff and putative class members in this Israeli action are included in the stipulated settlement of the U.S. class action unless an individual plaintiff opts out. On June 29, 2015, the plaintiff filed a motion for award of compensation and attorneys' fees based on the amount of settlement compensation received by Israelis in the U.S. class action. On January 14, 2016, the Israeli District Court denied this motion. Plaintiff has not timely appealed, that ruling is now final, and this 2008 action is now concluded.

On May 12, 2015, a new class action complaint was filed against us in Israel alleging similar claims as the dismissed Israeli class action and alleging that Israeli shareholders were deprived of due process in the U.S. class action settlement proceedings. We are opposing the new class action and plaintiff's class certification motion on substantially the same grounds on which the previous case was dismissed. The court held a pretrial hearing on that motion on May 19, 2016, at which it requested additional information including expert reports, a position paper from the Israel Securities Authority ("ISA") and further briefing. In July 2016, the ISA submitted a position paper supporting our position regarding applicable law. Other requested information has also now been submitted, but the court has not yet ruled.

Dolled v. Bergeron et al.

On April 19, 2013, a derivative action, Dolled v. Bergeron et al., Case No. 113-CV-245056, was filed in the Superior Court of California, County of Santa Clara in connection with our February 20, 2013 announcement of preliminary financial results for the fiscal quarter ended January 31, 2013. The action, brought derivatively on behalf of Verifone, names Verifone as a nominal defendant and brings claims for insider selling, breach of fiduciary duty and unjust enrichment variously against certain of our current and former officers and directors. The complaint seeks unspecified monetary damages, restitution and disgorgement of profits and compensation paid to defendants, injunctive relief directing us to reform its corporate governance, and payment of the plaintiff's costs and attorneys' fees. On May 30, 2013, the court entered the parties' stipulation and proposed order, which appointed plaintiff and plaintiff's counsel as lead plaintiff and lead counsel, respectively, in the consolidated action, captioned In re VeriFone Systems, Inc. Derivative Litigation. The next case management conference is scheduled for July 14, 2017.

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VERIFONE SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Zoumboulakis v. McGinn et al.

On May 24, 2013, a federal derivative action, Zoumboulakis v. McGinn et al., Case No. 13-CV-02379, was filed in the U.S. District Court for the Northern District of California against certain current and former directors and officers derivatively on our behalf. The complaint, which named us as a nominal defendant, alleges breach of fiduciary duty and abuse of control and asserts claims under Section 14(a) of the Securities Exchange Act of 1934 for false or misleading financial statements and proxy statement disclosures. The original complaint sought unspecified monetary damages, including exemplary damages, restitution from defendants, injunctive relief directing us to make certain corporate governance reforms, and payment of the plaintiff's costs and attorneys' fees. On August 12, 2013, the court granted defendants' motion to relate this action to the pending shareholder class action, Sanders v. VeriFone Systems, Inc. et al. On January 21, 2014, plaintiff filed a first amended complaint, which removed one of our former officers from the action and added an additional former director as a defendant. The first amended complaint asserted claims against the defendants for breach of fiduciary duty, abuse of control, violations of Securities Exchange Act Section 14(a) and unjust enrichment. The first amended complaint also included claims for insider trading against three of the named former and current directors. On August 7, 2014, the court granted our motion to dismiss the first amended complaint with leave to amend. On October 17, 2014, plaintiff filed a second amended complaint, to which we responded by filing another motion to dismiss. On December 3, 2015, the court granted our motion to dismiss, again with leave to amend. On January 20, 2016, plaintiff filed a third amended complaint alleging demand futility with respect to the current Board. On March 1, 2016, we filed another motion to dismiss, on which the court has not yet ruled.

If either of these derivative lawsuits is resolved adversely to us, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Indian Antitrust Proceedings

The Competition Commission of India ("CCI") investigated certain complaints made against us alleging unfair practices based on certain provisions in our software development license arrangements in India. We cooperated with requests by the CCI in its investigation. In March 2014, the Director General of the CCI investigating the allegations issued a report rejecting certain of the allegations, but also finding that certain provisions of our licenses may constitute unfair business practices. VeriFone India Sales Pvt. Ltd. filed objections to that report.

In April 2015, the CCI issued rulings directing Verifone India to cease and desist from engaging in the alleged anti-competitive conduct and imposing a penalty, the amount of which is not material to our results of operations. We have deposited 10% of this penalty amount and accrued the balance while we appeal these rulings.

On June 15, 2015, we filed appeals and interim applications with the Competition Appellate Tribunal ("COMPAT") to stay the CCI orders. The appellate court granted our interim applications to stay all proceedings at least until the final appellate hearing. That appellate hearing commenced on January 19, 2016, and was next scheduled to continue on May 31, 2017, but was taken off that tribunal's calendar due to the May 26, 2017 merger of the COMPAT with the National Company Law Appellate Tribunal ("NCLAT"). These appeals will now be reheard before the NCLAT Bench starting on July 7, 2017.

The CCI's rulings reserved the right to pursue additional proceedings against individuals that it deems responsible for the alleged conduct. We are unable to make any estimate of potential loss for any further proceedings the CCI may pursue but do not expect it to be material to our results of operations.

22

VERIFONE SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Other Litigation

Certain of the foregoing cases are still in the preliminary stages, and we are not able to quantify the extent of our potential liability, if any, other than as described above. Further, the outcome of litigation is inherently unpredictable and subject to significant uncertainties. If any of these matters are resolved adversely to us, this could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, defending these legal proceedings is likely to be costly, which may have a material adverse effect on our financial condition, results of operations and cash flows, and may divert management's attention from the day-to-day operations of our business. We are subject to various other legal proceedings related to commercial, customer and employment matters that have arisen during the ordinary course of business. The outcome of such legal proceedings is inherently unpredictable and subject to significant uncertainties. Although there can be no assurance as to the ultimate disposition of these matters, our management has determined, based upon the information available at the date of these financial statements, including anticipated expected availability of insurance coverage, that the expected outcome of these matters, individually or in the aggregate, will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Income Tax Uncertainties

As of April 30, 2017, the amount payable for unrecognized tax benefits was $34.4 million, including accrued interest and penalties, none of which is expected to be paid within one year. This amount is included in Other long-term liabilities in our Condensed Consolidated Balance Sheet as of April 30, 2017. We are unable to make a reasonably reliable estimate as to when cash settlement with a taxing authority may occur.

Note 11. Segment and Geographic Information

Net revenues and operating income (loss) of each segment reflect net revenues and expenses that are directly attributable to that segment. Net revenues and expenses not allocated to segment net revenues and segment operating income include amortization of purchased intangible assets, amortization of step-down in deferred services net revenues and associated costs of net revenues at acquisition, restructuring and related charges, stock-based compensation, as well as general and administrative and corporate research and development expense. We do not separately evaluate assets by segment and therefore assets by segment are not presented below.

The following table sets forth net revenues for our reportable segments and reconciles segment net revenues to total net revenues (in thousands):

	Three Months Ended April 30,						Six Months Ended April 30,
	2017			2016			2017			2016
Segment net revenues:
Verifone Systems	$	285,675		$	342,443		$	551,076		$	680,035
Verifone Services	188,255			189,913			379,473			365,877
Total segment net revenues	473,930			532,356			930,549			1,045,912
Amortization of step down in deferred services net revenues at acquisition	(245		)	(6,078		)	(2,993		)	(6,095		)
Total net revenues	$	473,685		$	526,278		$	927,556		$	1,039,817

23

VERIFONE SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table sets forth operating income for our reportable segments and reconciles segment operating income to consolidated operating income (loss) (in thousands):

	Three Months Ended April 30,						Six Months Ended April 30,
	2017			2016			2017			2016
Operating income by segment:
Verifone Systems	$	47,029		$	77,969		$	87,741		$	158,870
Verifone Services	43,736			46,446			88,559			88,575
Total segment operating income	90,765			124,415			176,300			247,445
Items not attributable to segment operating income:
Amortization of step down in deferred services gross margin at acquisition	(191		)	(4,408		)	(2,385		)	(4,425		)
Restructuring and related charges	(80,409		)	(575		)	(82,307		)	(478		)
Amortization of purchase intangible assets	(20,043		)	(25,794		)	(41,251		)	(49,409		)
Stock-based compensation expense	(11,178		)	(11,579		)	(20,731		)	(22,039		)
Goodwill impairment	(17,384		)	—			(17,384		)	—
Unallocated general and administrative expenses	(41,777		)	(49,891		)	(86,765		)	(97,835		)
Unallocated research and development expenses	(1,051		)	(4,705		)	(10,689		)	(9,593		)
Other unallocated costs	(126		)	(7,684		)	(617		)	(7,671		)
Total operating income (loss)	$	(81,394	)	$	19,779		$	(85,829	)	$	55,995

24

VERIFONE SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This section should be read in conjunction with our consolidated financial statements and related notes included in our 2016 Annual Report on Form 10-K and the Condensed Consolidated Financial Statements and Notes included in Part I, Item I of this Quarterly Report on Form 10-Q. This section and other parts of this Quarterly Report on Form 10-Q and certain information incorporated by reference herein contain forward-looking statements that involve risks and uncertainties. In some cases, forward-looking statements can be identified by words such as "may," "should," "expect," "plan," "intend," "anticipate," "believe," "estimate," "predict," "potential," or "continue," the negative of such terms, or comparable terminology. Such forward-looking statements are based on current expectations, estimates, and projections about our industry and management's beliefs and assumptions, and do not reflect the potential impact of any mergers, acquisitions, or other business combinations or divestitures that have not been completed. Forward-looking statements are not guarantees of future performance and our actual results may differ materially from the results expressed or implied in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A, Risk Factors, in our 2016 Annual Report on Form 10-K and in Part II, Item 1A, Risk Factors, of this Quarterly Report on Form 10-Q, and elsewhere in these reports, including our disclosures of Critical Accounting Policies and Estimates in Part II, Item 7 in our 2016 Annual Report on Form 10-K and in Part I, Item 2 of this Quarterly Report on Form 10-Q, and our disclosures in Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk in our 2016 Annual Report on Form 10-K and in Part I, Item 3, Quantitative and Qualitative Disclosures About Market Risk of this Quarterly Report on Form 10-Q, as well as in our Condensed Consolidated Financial Statements and Notes thereto. We are under no duty to update any of the forward-looking statements after the date of this Quarterly Report on Form 10-Q to conform such statements to actual results or to changes in expectations. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.

In this Quarterly Report on Form 10-Q, each of the terms “VeriFone,” "Company," "us," "we," and "our" refers to VeriFone Systems, Inc. and its consolidated subsidiaries.

Our Management's Discussion and Analysis of Financial Condition and Results of Operations is provided in addition to our Condensed Consolidated Financial Statements and accompanying notes to assist readers in understanding our results of operations, financial condition and cash flows. This section is organized as follows:

Overview: A discussion of our business.

Results of Operations:

Consolidated Results of Operations: An analysis and discussion of our financial results comparing our consolidated results of operations for the three and six months ended April 30, 2017 to the three and six months ended April 30, 2016.

Segment Results of Operations: An analysis and discussion of our financial results comparing the results of operations for each of our two reportable segments, Verifone Systems and Verifone Services, for the three and six months ended April 30, 2017 to the three and six months ended April 30, 2016.

Financial Outlook: A discussion of our expectations regarding certain trends that may affect our financial condition and results of operations.

Liquidity and Capital Resources: An analysis of changes in our balance sheets and cash flows, and discussion of our financial condition and potential sources of liquidity.

Contractual Obligations and Off-Balance Sheet Arrangements: Disclosures related to our contractual obligations, contingent liabilities, commitments and off-balance-sheet arrangements, as of April 30, 2017.

Critical Accounting Policies and Estimates: A discussion of the accounting policies and estimates that we believe are most important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts, as well as recent accounting pronouncements that have had or are expected to have a material impact on our results of operations.

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Overview

Our Business

We are a global leader in payments and commerce solutions. We provide expertise and solutions that add value at the retail point-of-sale (POS) and enable innovative forms of commerce. For 35 years, we have been a leader in designing, manufacturing, marketing and supplying a broad range of innovative payment solutions, including customer payments acceptance, connectivity between merchants and financial institutions, as well as security and comprehensive payment and commerce services. We focus on delivering solutions that include innovative POS payment capabilities, value-added services that increase merchant revenues and enhance the consumer experience, and solutions that enrich and improve the interaction between merchants and consumers and help merchants run their businesses more efficiently. Key industries in which we operate include financial services, retail, petroleum, restaurant, hospitality, transportation and healthcare.

The markets in which we operate are highly competitive. We compete based on various factors, including product functions and features, pricing, product quality and reliability, design innovation, interoperability with third-party systems and brand reputation. We also compete based on product availability and certifications, as well as service offerings and support. We continue to experience competition from traditional POS terminal providers as well as suppliers of ECRs that provide built-in electronic payment capabilities and producers of software that facilitates electronic payments over the Internet, and we also see new companies entering our markets, including entrants offering various forms of mobile device based payment options. In certain geographic markets, such as China and Brazil, we see customers requiring a choice of lower cost offerings. This trend has increased competition and pricing pressures in those geographies.

We have two operating segments: Verifone Systems and Verifone Services. Verifone Systems delivers point of sale electronic payment devices that run our unique operating systems, security and encryption software, and certified payment software for both payments and commerce. Verifone Services delivers device related services and maintenance, payment transaction routing and reporting, and commerce based services. Our reportable segments are the same as our operating segments.

Systems

Sales of our point of sale electronic payment devices and systems comprise approximately 60.3% and 59.4% of our net revenues in the three and six months ended April 30, 2017, respectively. Our point of sale electronic payment devices run our unique operating systems, security and encryption software, and certified payment software, and are designed to suit our clients' needs in a variety of environments, including traditional multilane and countertop implementations, self-service or unattended environments, in-vehicle and portable deployments, mobile point-of-sale solutions, as well as fully integrated POS solutions. Our systems can securely process a wide range of payment types including signature and PIN-based debit cards, credit cards, NFC/contactless/radio frequency identification cards, or RFID cards, smart cards, pre-paid gift and other stored-value cards, electronic bill payment, signature capture and electronic benefits transfer, or EBT. Our unique architecture enables multiple value-added applications, including third-party applications, such as gift card and loyalty card programs, healthcare insurance eligibility and time and attendance tracking, and allows these applications to reside on the same system without requiring recertification upon the addition of new applications. During the past year we introduced Verifone Engage, the next generation of our best-selling suite of devices, which is a family of interactive, commerce-enabled payment devices that we believe offer an innovative connected payments experience. We also launched Verifone Carbon, an integrated dual-screen connected point-of-sale solution that enables merchants to run register and business applications from a tablet screen while enabling consumers to pay and interact with a consumer-facing screen. Combining our Verifone Engage and Carbon payment solutions with our mobile and value family of devices, we are able to deliver rich media and complex commerce enablement services on our payment terminals to our merchant clients, as well as mobile solutions and products geared for price sensitive emerging markets. Security continues to be an important factor for all of our clients and we have experienced increasing demand for Europay, MasterCard and Visa (EMV), capable terminal solutions.

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Services

Services are an important part of our business and revenues, accounting for approximately 39.7% and 40.6% of our net revenues in the three and six months ended April 30, 2017, respectively. We offer a wide portfolio of services including device, payment, commerce and omni-channel services. Our traditional device services include professional services related to installation and deployment, helpdesk support, training, equipment repair and maintenance, terminal management services and software post-contract support. Our payment services include gateway solutions that enable more efficient routing of transactions, multi-channel acceptance and processing, along with end-to-end encryption to reduce the complexity and costs of Payment Card Industry (PCI), standards compliance. Our commerce services leverage our terminals to drive incremental consumer sales by engaging consumers at the point of sale through value-added applications such as loyalty and couponing applications, targeted offers and real-time reward redemptions. Our omni-channel services provide seamless interoperability between online and offline payments.

Timing of Revenue

The timing of our customer orders may cause our revenue to vary from period to period. Specifically, revenues recognized in our fiscal quarters can vary significantly when larger customers or our distributors delay orders due to regulatory and industry standards compliance, budget considerations, product feature availability, dual vendor sourcing requirements, technology refresh cycles, economic conditions or other concerns that impact their business or purchasing decisions. For example, the timing of customer orders is often impacted by the timing of technology refreshes or the timing of completed product certifications by a particular customer or in a particular market. Customer purchases have also been impacted by regulatory factors such as new or pending banking regulations and government initiatives to drive cashless transactions.

In addition, revenues can be back-end weighted when we receive sales orders and deliver a higher proportion of our systems toward the end of our fiscal quarters. This variability and back-end weighting of orders may adversely affect our results of operations in a number of ways and could negatively impact revenues and profits. First, the product mix of orders may not align with manufacturing forecasts, which could result in a shortage of the components needed for production. Second, existing manufacturing capacity may not be sufficient to deliver the desired volume of orders in a concentrated time when they are received. Third, back-end weighted demand could negatively impact gross margins through higher labor, delivery and other manufacturing and distribution costs. If, on the other hand, we were to seek to manage the fulfillment of back-end weighted orders through holding increased inventory levels, we would risk higher inventory obsolescence charges if our sales fall short of our expectations.

Because our revenue recognition depends on, among other things, the timing of product shipments, decisions we make about product shipments, particularly toward the end of a fiscal quarter, may impact our reported revenues. The timing of product shipments may depend on a number of factors, including costs of air shipments if required, the delivery date requested by customers and our operating capacity to fill orders and ship products, as well as our own long and short-term business planning and supply chain management. These factors may affect timing of shipments and consequently revenues recognized for a particular period.

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Significant Matters

Petroleum Media Business

During March 2017, as part of our strategic review of under-performing businesses, our management committed to a plan to exit our petroleum media business. In connection with this decision, we are in the process of terminating certain customer agreements and have contributed certain assets to a newly formed business, Gas Media, in exchange for a 50% ownership interest in that business. As of April 30, 2017, we have classified the remaining net assets and liabilities of this business as held for sale and recorded a net $67.6 million charge in connection with this transaction.

Taxi Solutions Business

During March 2017, also in connection with our strategic review of under-performing businesses, our management committed to a plan to sell our Taxi Solutions reporting unit. In connection with this decision, management concluded that the carrying amount of the goodwill related to our Taxi Solutions reporting unit may not be recoverable. Based on a quantitative assessment, considering potential sales transactions, management determined the fair value of the reporting unit and concluded that the goodwill was impaired by $17.4 million. As of April 30, 2017 the net assets and liabilities of this business were presented as held for sale in Prepaid expenses and other current assets on our Condensed Consolidated Balance Sheet as of April 30, 2017.

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Results of Operations

Consolidated Results of Operations

Three Months Ended April 30, 2017 compared to April 30, 2016

	Three Months Ended April 30,
	2017			% of Net revenues (1)	2016			% of Net revenues (1)
	(in thousands, except percentages)
Net revenues:
Systems	$	285,675		60.3%	$	342,443		65.1%
Services	188,010			39.7%	183,835			34.9%
Total net revenues	473,685			100.0%	526,278			100.0%
Gross margin:
Systems	109,456			38.3%	141,899			41.4%
Services	63,305			33.7%	68,480			37.3%
Gross margin	172,761			36.5%	210,379			40.0%
Operating expenses:
Research and development	51,771			10.9%	54,120			10.3%
Sales and marketing	50,935			10.8%	59,040			11.2%
General and administrative	46,755			9.9%	54,863			10.4%
Restructuring and related charges	68,896			14.5%	603			0.1%
Amortization of purchased intangible assets	18,414			3.9%	21,974			4.2%
Goodwill impairment	17,384			3.7%	—			—%
Total operating expenses	254,155			53.8%	190,600			36.2%
Operating income (loss)	(81,394		)	(17.2)%	19,779			3.8%
Interest expense, net	(8,185		)	(1.7)%	(8,543		)	(1.6)%
Other income (expense), net	8,796			1.9%	(4,809		)	(0.9)%
Income (loss) before income taxes	(80,783		)	(17.1)%	6,427			1.2%
Income tax provision	8,882			2.0%	3,087			0.6%
Consolidated net income (loss)	$	(89,665	)	(18.9)%	$	3,340		0.6%

(1) Systems and Services gross margin as a percentage of net revenues is computed as a percentage of the corresponding Systems and Services net revenues.

Net revenues for the three months ended April 30, 2017 were $473.7 million, compared to $526.3 million for the three months ended April 30, 2016, down$52.6 million or 10.0%. Systems net revenues decreased $56.8 million primarily as a result of decreased demand for EMV enabled devices and reductions due to the timing of certain large customer purchases, which were partially offset by increased revenues due to India demonetization initiatives. (See further discussion of net revenues by segment and geography below.)

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Net Revenues by Geography

		Three Months Ended April 30,
		2017		% of Net revenues	2016		% of Net revenues
		(in thousands, except percentages)
Net Revenues
North America		$	157,438	33.2%	$	209,338	39.8%
Latin America		62,542		13.2%	69,788		13.2%
EMEA		177,713		37.5%	196,982		37.4%
Asia-Pacific		75,992		16.1%	50,170		9.5%
	Total	$	473,685	100.0%	$	526,278	100.0%

• North America net revenuesdecreased$51.9 million, due primarily to reduced demand for our EMV capable terminals by customers that had upgraded to products that support EMV requirements in the prior year and EMV liability deadline extensions for the petroleum market.

• Latin America net revenuesdecreased$7.2 million, due primarily to changes in timing of purchase decisions by large customers, which were influenced by factors such as macroeconomic conditions, the timing of customer technology refreshes, and ongoing competitive pricing.

• EMEA net revenuesdecreased$19.3 million, primarily as a result of changes in timing of purchase decisions, which were influenced by factors such as macroeconomic conditions, government fiscalization programs, the timing of customer technology refreshes, and ongoing competitive pricing.

• Asia-Pacific net revenues increased$25.8 million, driven primarily by increases in India as a result of government demonetization initiatives.

Gross margin for the three months ended April 30, 2017 was $172.8 million or 36.5% of total net revenues, compared to $210.4 million or 40.0% of total net revenues, for the three months ended April 30, 2016, down$37.6 million or 3.5 percentage points. Gross margin in dollars decreased due primarily to the decrease in net revenues and $10.6 million write-down of inventory related to our petroleum media business. Gross margin as a percentage of net revenues decreased due primarily to changes in geographic and product mix, such as the decrease in net revenues from North America, which generally have higher gross margins compared to other geographies, as well as the $10.6 million write-down of inventory related to our petroleum media business.

Research and development for the three months ended April 30, 2017 was $51.8 million compared to $54.1 million for the three months ended April 30, 2016, down$2.3 million or 4.3%, due to higher costs in the prior year associated with additional personnel and outside resources to develop and bring next generation products and solutions to market.

Sales and marketing for the three months ended April 30, 2017 was $50.9 million, compared to $59.0 million for the three months ended April 30, 2016, down$8.1 million or 13.7%, due primarily to reduced variable costs associated with lower revenues and decreased spend associated with cost savings initiatives.

General and administrative for the three months ended April 30, 2017 was $46.8 million, compared to $54.9 million for the three months ended April 30, 2016, down$8.1 million or 14.8%, due primarily to decreased spend associated with cost savings initiatives.

Restructuring and related charges for the three months ended April 30, 2017 was $68.9 million, compared to $0.6 million for the three months ended April 30, 2016, up$68.3 million primarily as a result of a $38.5 million fair market value write-down associated with our exit from the petroleum media business, as well as a $28.1 million charge for future obligations associated with terminated customer agreements.

30

Amortization of purchased intangible assets for the three months ended April 30, 2017 was $18.4 million, compared to $22.0 million for the three months ended April 30, 2016, down$3.6 million or 16.4%, primarily because a portion of our purchased intangible assets were fully amortized in the prior year.

Goodwill impairment for the three months ended April 30, 2017 was $17.4 million and resulted from a quantitative assessment of the fair value of our Taxi Solutions reporting unit.

Other income (expense), net for the three months ended April 30, 2017 was $8.8 million of net income compared to net expense of $4.8 million for the three months ended April 30, 2016, a $13.6 million change, due primarily to a $9.6 million gain recognized in connection with the Gas Media transaction.

Income tax provision for the three months ended April 30, 2017 was $8.9 million, compared to $3.1 million for the three months ended April 30, 2016, up$5.8 million or 187.9%. The income tax provision for three months ended April 30, 2017 was primarily related to foreign taxes and discrete items associated with restructuring related charges. The income tax provision for the three months ended April 30, 2016 was primarily related to foreign taxes partially offset by the reversal of unrecognized tax benefits where statute of limitations expired or audits have been settled.

31

Six Months Ended April 30, 2017 compared to April 30, 2016

	Six Months Ended April 30,
	2017			% of Net revenues(1)	2016			% of Net revenues(1)
	(in thousands, except percentages)
Net revenues:
Systems	$	551,076		59.4%	$	680,035		65.4%
Services	376,480			40.6%	359,782			34.6%
Total net revenues	927,556			100.0%	1,039,817			100.0%
Gross margin:
Systems	208,465			37.8%	284,686			41.9%
Services	135,727			36.1%	140,978			39.2%
Total gross margin	344,192			37.1%	425,664			40.9%
Operating expenses:
Research and development	107,723			11.6%	105,755			10.2%
Sales and marketing	100,141			10.8%	114,459			11.0%
General and administrative	97,558			10.5%	107,288			10.3%
Restructuring and related charges	70,038			7.6%	567			0.1%
Amortization of purchased intangible assets	37,177			4.0%	41,600			4.0%
Goodwill impairment	17,384			1.9%	—			—%
Total operating expenses	430,021			46.4%	369,669			35.6%
Operating income (loss)	(85,829		)	(9.3)%	55,995			5.4%
Interest expense, net	(16,332		)	(1.8)%	(16,847		)	(1.6)%
Other income (expense), net	6,574			0.7%	(6,989		)	(0.7)%
Income (loss) before income taxes	(95,587		)	(10.3)%	32,159			3.1%
Income tax provision	11,802			1.3%	5,086			0.5%
Consolidated net income (loss)	$	(107,389	)	(11.6)%	$	27,073		2.6%

(1) Systems and Services gross margin as a percentage of net revenues is computed as a percentage of the corresponding Systems and Services net revenues.

Net revenues for the six months ended April 30, 2017 were $927.6 million, compared to $1.04 billion for the six months ended April 30, 2016, down$112.2 million or 10.8%, due primarily to decreased demand for EMV enabled devices and timing of certain large customer purchases, which were partially offset by increased revenues due to India demonetization initiatives. (See further discussion of revenues by segment and geography below.)

32

Net Revenues by Geography

		Six Months Ended April 30,
		2017		% of net revenues	2016		% of net revenues
		(in thousands, except percentages)
Net Revenues
North America		$	323,241	34.9%	$	445,034	42.8%
Latin America		119,540		12.9%	124,568		12.0%
EMEA		345,835		37.2%	367,370		35.3%
Asia-Pacific		138,940		15.0%	102,845		9.9%
	Total	$	927,556	100.0%	$	1,039,817	100.0%

• North America net revenuesdecreased$121.8 million, due primarily to reduced demand for our EMV capable terminals by customers that had upgraded to products that support EMV requirements in the prior year and EMV liability deadline extensions for the petroleum market.

• Latin America net revenuesdecreased$5.0 million, due primarily to changes in timing of purchase decisions by large customers, which were influenced by factors such as macroeconomic conditions, timing of customer technology refreshes, and ongoing competitive pricing.

• EMEA net revenuesdecreased$21.5 million, as a result of changes in timing of purchased decisions, which were influenced by factors such as macroeconomic conditions, government fiscalization programs, timing of customer technology refreshes, and ongoing competitive pricing.

• Asia-Pacific net revenues increased$36.1 million, due primarily to increases in India as a result of government demonetization initiatives.

Gross margin for the six months ended April 30, 2017 was $344.2 million or 37.1% of net revenues, compared to $425.7 million, or 40.9% of net revenues, for the six months ended April 30, 2016, down$81.5 million or 3.8 percentage points. Gross margin in dollars decreased due primarily to the decrease in net revenues and $10.6 million write-down of inventory related to our petroleum media business. Gross margin as a percentage of net revenues decreased due primarily to changes in geographic and product mix, such as decreases in net revenues from North America, which generally have higher gross margins compared to other geographies, as well as the $10.6 million write-down of inventory related to our petroleum media business.

Research and development for the six months ended April 30, 2017 was $107.7 million compared to $105.8 million for the six months ended April 30, 2016, up$1.9 million or 1.8%, due primarily to a $7.1 million write-down of capitalized costs associated with development projects that will not be completed, which was partially offset by higher costs in the prior year associated with additional personnel and outside resources needed to develop and bring next generation products and solutions to market.

Sales and marketing for the six months ended April 30, 2017 was $100.1 million, compared to $114.5 million for the six months ended April 30, 2016, down$14.4 million or 12.6%, due primarily to reduced variable costs associated with lower revenues and decreased spend associated with cost savings initiatives.

General and administrative for the six months ended April 30, 2017 was $97.6 million compared to $107.3 million for the six months ended April 30, 2016, down$9.7 million or 9.0%, due primarily to decreased spend associated with cost savings initiatives, partially offset by additional costs associated with acquired businesses.

33

Restructuring and related charges for the six months ended April 30, 2017 was $70.0 million compared to $0.6 million for the six months ended April 30, 2016, up$69.4 million, due primarily to a $38.5 million fair market value write-down associated with our exit from the petroleum media business, as well as a $28.1 million charge for future obligations associated with terminated customer agreements.

Amortization of purchased intangible assets for the six months ended April 30, 2017 was $37.2 million compared to $41.6 million for the six months ended April 30, 2016, down$4.4 million or 10.6%, primarily because a portion of our purchased intangible assets were fully amortized in the prior year, partially offset by an increase in amortization for purchased intangible assets associated with recently acquired businesses.

Goodwill impairment for the six months ended April 30, 2017 was $17.4 million related to our Taxi Solutions reporting unit based on a quantitative assessment and potential sales transactions.

Other income (expense), net for the six months ended April 30, 2017 was $6.6 million of net income compared to net expense of $7.0 million for the six months ended April 30, 2016, a $13.6 million change. This change is due primarily to a $9.6 million gain recognized in connection with the Gas Media transaction.

Income tax provision for the six months ended April 30, 2017 was $11.8 million, compared to $5.1 million for the six months ended April 30, 2016, up$6.7 million or 131.4%. The income tax provisions for both six months ended April 30, 2017 and April 30, 2016 were primarily related to foreign taxes and other discrete items associated with restructuring related charges.

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Segment Results of Operations

Net revenues and operating income of each segment reflect net revenues and expenses that are directly attributable to that segment. Net revenues and expenses not allocated to segment net revenues and segment operating income include amortization of purchased intangible assets, amortization of step-down in deferred services net revenues and associated costs of net revenues at acquisition, restructuring and related charges, stock-based compensation, as well as general and administrative and corporate research and development expense.

Verifone Systems Net Revenues and Operating Income

Our Verifone Systems business delivers point of sale electronic payment devices that run our unique operating systems, security and encryption software, and certified payment software globally, for both payments and commerce.

Three Months Ended April 30, 2017 compared to April 30, 2016

	Three Months Ended April 30,
	2017		% of Net revenues		2016		% of Net revenues
	(in thousands, except percentages)
Net revenues	$	285,675	60.3	%	$	342,443	64.3	%
Operating income	$	47,029	16.5	%	$	77,969	22.8	%

Net revenues for the three months ended April 30, 2017 were $285.7 million, compared to $342.4 million for the three months ended April 30, 2016, down$56.8 million or 16.6%. Net revenues from EMV capable devices decreased by $71.3 million due primarily to reduced demand as customers upgraded to products that support EMV requirements in the prior year and EMV liability deadline extensions for the petroleum market. This was partially offset by net revenues from unattended, portable and mobile devices, which increased $10.8 million due primarily to government demonetization initiatives in India. The remaining revenue fluctuations are generally associated with the timing of customer demand, which was influenced by factors such as timing of equipment upgrades, government initiatives and macroeconomic conditions.

Operating income for the three months ended April 30, 2017 was $47.0 million or 16.5% of net revenues, compared to $78.0 million or 22.8% of net revenues for the three months ended April 30, 2016, down$30.9 million or 6.4 percentage points. Operating income in dollars decreased due primarily to reduced net revenues. Operating income as a percentage of net revenues decreased due primarily to changes in geographic and product mix, such as the shift away from North America and EMEA, which generally have higher margins compared to other geographies.

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Six Months Ended April 30, 2017 compared to April 30, 2016

	Six Months Ended April 30,
	2017		% of Net revenues		2016		% of Net revenues
	(in thousands, except percentages)
Net revenues	$	551,076	59.2	%	$	680,035	65.0	%
Operating income	$	87,741	15.9	%	$	158,870	23.4	%

Net revenues for the six months ended April 30, 2017 were $551.1 million, compared to $680.0 million for the six months ended April 30, 2016, down$129.0 million or 19.0%. Net revenues from our EMV capable devices decreased by $153.4 million due primarily to reduced demand by customers that had upgraded to products that support EMV requirements in the prior year and EMV liability deadline extensions for the petroleum market. Net revenues from the sale of unattended, portable and mobile devices increased by $20.5 million due primarily to increased demand in India related to the government demonetization initiatives, which was partially offset by decreased demand in Europe related to the timing of customer tenders.