8/10/06

Hypercom Corporation Announces Second Quarter 2006 Financial Results

Paul Demery , Managing Editor, B2B E-commerce

PHOENIX, Aug 04, 2006 -- Hypercom Corporation (NYSE:HYC), the high-security electronic transaction solutions provider, today announced financial results for the three months ended June 30, 2006.

Revenue for the second quarter of 2006 was $66.1 million, a 10.0% increase compared to $60.2 million of revenue in the same quarter of 2005, and an 8.5% increase compared to first quarter 2006 revenue of $61.0 million. The year over year and sequential revenue growth was primarily attributable to product sales and services expansion in Brazil, increased product sales in Mexico and growth in certain Central European markets.

Gross profit for the second quarter of 2006 was $27.4 million, or 41.4% of revenue compared to gross profit of $7.7 million, or 12.9% of revenue, for the same quarter of 2005, and a 16.5% increase compared to first quarter 2006 gross profit of $23.5 million, or 38.6% of revenue. The prior year`s gross profit included $13.5 million of non-recurring restructuring and other costs associated with management`s 2005 comprehensive business review. For the three months ended June 30, 2006, gross profit benefited by approximately 1.8% as a result of the expiration of a specific warranty program related to end-of-life products for $1.2 million less than previously estimated. Gross profit as a percentage of revenue can vary significantly depending upon the specific quarterly revenue mix of customers, products, and services; relative revenue contribution by geographic region; variation in manufacturing costs; and other factors.

Operating expenses for the second quarter of 2006 were $23.0 million, a decrease of $2.2 million compared to $25.2 million of operating expenses in the same quarter of 2005, but an increase of $2.4 million compared to first quarter 2006 operating expenses of $20.6 million. Operating expenses in the second quarter of 2006 included $1.9 million of non-cash stock-based compensation expense, compared to $0.1 million in the same quarter of 2005. Operating expenses in the second quarter of 2005 included $2.5 million of non-recurring restructuring and other costs. Sequentially, second quarter 2006 operating expenses increased compared to first quarter primarily due to a $1.1 million increase in stock-based compensation expense, a $1.0 million increase in selling and marketing costs related to increased variable selling costs, trade shows and conferences, and a $0.5 million increase in research and development expense, partially offset by a reduction in general and administrative costs.

Operating profit for the second quarter of 2006 was $4.4 million, or 6.7% of revenue, an improvement of $21.9 million compared to the operating loss of $(17.5) million in the same quarter of 2005, and an increase of $1.5 million compared to first quarter 2006 operating profit of $2.9 million, or 4.8% of revenue. The prior year`s operating profit included $16.0 million of restructuring charges associated with management`s 2005 comprehensive business review. Sequentially, second quarter of 2006 operating profit increased compared to first quarter primarily due to higher gross profit, incremental operating expense leverage on higher revenue, partially offset by $1.1 million of incremental stock-based compensation charges.

Income before discontinued operations for the second quarter of 2006 was $4.2 million or $0.08 per diluted share compared to a loss of $(18.1) million or $(0.35) per diluted share in the same quarter of 2005; and income of $2.8 million or $0.05 per diluted share in the first quarter of 2006. The 2005 second quarter loss before discontinued operations included restructuring charges of $16.0 million or $(0.30) per fully diluted share.

In the second quarter of 2006, the Company completed the sale of its UK-based leasing business for net proceeds of $12.1 million. In the fourth quarter of 2005, the Company reclassified operating results related to this business as discontinued operations as a result of management`s decision to sell the business to a third party. Second quarter 2006 income from discontinued operations of $2.0 million included quarterly operational profits from the UK leasing business of $0.4 million, as well as a gain on sale of the lease assets of $1.6 million, net of transaction costs. Comparatively, income from discontinued operations was $1.5 million in the same quarter of 2005 and $0.4 million in the first quarter of 2006.

Net income for the second quarter of 2006 was $6.2 million or $0.11 per diluted share compared to a net loss of $16.7 million or $(0.32) per diluted share in the second quarter of 2005; and net income of $3.1 million or $0.06 per diluted share in the first quarter of 2006. The 2005 second quarter net income included restructuring charges of $16.0 million. Due to the implementation of FAS 123R, stock-based compensation is an expense in the 2006 financial statements, whereas it was a footnote disclosure in 2005. For comparability purposes, adjusted non-GAAP net income, excluding stock-based compensation, in the three months ended June 30, 2006, was $8.2 million, or $0.15 per non-GAAP diluted share, compared to $4.0 million or $0.07 per non-GAAP diluted share in the first quarter of 2006, and a net loss of $16.6 million or $(0.32) per non-GAAP diluted share in the same quarter of 2005. "The results of the second quarter continue to reflect both the commitment and execution by Hypercom`s management team and our associates worldwide," said Hypercom CEO William Keiper. "We are pleased with the acceptance of the Optimum product line globally, and the fact that several products have recently been embraced as `best in class` by major Hypercom customers and partners. The Company remains committed to revenue growth through focused client development, aggressive product introductions, cost control, and bottom-line profitability in the second half of 2006." Hypercom has recently announced several new marketing initiatives including:

-- Symbol Technologies: A strategic global relationship with Symbol Technologies, Inc. under which Hypercom will provide payment devices for resale by Symbol. This relationship will initially focus on expanding Symbol and Hypercom large retailer multi-lane market share in North America with the next step being the expansion of the relationship into other international markets.

-- Wincor Nixdorf: A strategic global reseller agreement with Wincor Nixdorf, a global leader of IT solutions to the retail and banking industries, under which Wincor Nixdorf will offer Hypercom`s multi-lane Optimum payment terminals as a key part of its total solutions for grocery and convenience stores, mass merchandisers, specialty retailers, and quick service restaurants in the United States. The agreement is designed to carry into international markets as well.

-- StoreNext Retail Technologies: The number one United States supplier of retail technology to independent grocers and regional chains will market Hypercom`s Optimum multi-lane payment terminals to its customers via its national dealer network to provide merchants with end-to-end payment systems.

-- NOVA Information Systems: A wholly-owned subsidiary of U.S. Bancorp and the third largest merchant acquirer in North America selected Hypercom as the preferred provider of card payment terminals and peripherals. NOVA has launched several sales initiatives centered around Hypercom products including an exclusive field upgrade campaign.

-- Fifth Third Bank Processing Solutions: The fourth largest bankcard acquirer in the United States certified Hypercom`s T4100 multi-application payment terminal, opening an important new sales channel through the bank`s merchant services operation that includes over 30,000 merchants in 147,000 locations.

-- Element Payment Services: A leading North American independent sales organization that serves over 30,000 merchants certified Hypercom`s Optimum T4100 multi-application payment terminal and will begin to sell and support the T4100 into its existing customer base.

-- Sociedade Interbancaria de Servicos: Entry into the Portugal card payment terminal market following their certification of the Optimum P2100.

-- EFTPOS (Pty) Ltd: One of South Africa`s leading electronic funds transfer companies was appointed as Hypercom`s distributor in South Africa to support new and under-served sales channels and expand Hypercom`s footprint to other emerging African markets.

Conference Call

Hypercom`s conference call to discuss the financial results for the period ended March 31, 2006, will be held on Friday, August 4, 2006, at 8:30 a.m. EST. The conference call will be simultaneously webcast at Hypercom`s Web site, www.hypercom.com, and will also be available approximately seven days after the call has concluded in the Investor Relations section under "audio.archive."

Reconciliation of Non-GAAP Measures

This earnings release contains non-GAAP financial measures. These non-GAAP measures are not in accordance with, or an alternative for, generally accepted accounting principles and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. For purposes of Regulation G, a non-GAAP financial measure is a numerical measure of a registrant`s historical or future financial performance, financial position or cash flows that excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles in the United States ("GAAP") in the statement of income, balance sheet, or statement of cash flows (or equivalent statements) of the issuer; or includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable GAAP measure. Pursuant to the requirements of Regulation G, the Company has provided a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures.

In the attached release we include non-GAAP net income (loss) which consists of net income (loss) excluding share-based compensation. We also include non-GAAP diluted income (loss) per diluted share which is calculated by dividing non-GAAP net income (loss) by the weighted average diluted shares outstanding.

We believe non-GAAP net income (loss) and non-GAAP income (loss) per diluted share provide important supplemental information that allows investors to see our results through the eyes of management. In part, we have included the non-GAAP measures in our earnings releases in response to recurring requests from investors for this information. Management uses such non-GAAP measures in its quarterly evaluation of our results of our operations, as do some of our competitors, because such measures facilitate comparisons to prior period results. In the past, we have elected to use these non-GAAP measures for internal measurement of certain goals and targets (including our incentive compensation plans) and operating division profitability analysis.

These non-GAAP measures have limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP and the non-GAAP measures and related non-GAAP adjustments are not intended to be considered in isolation, as a substitute for the actual results in this earnings release or presented in accordance with GAAP. Management has attempted to use a consistent method from quarter to quarter and year to year when computing the non-GAAP financial measures.

About Hypercom (www.hypercom.com)
Global payment technology leader Hypercom Corporation (NYSE:HYC) delivers a full suite of high-security, end-to-end electronic payment products and services. The Company`s solutions address the high-security electronic transaction needs of banks and other financial institutions, processors, large scale retailers, smaller merchants, quick service restaurants, and users in the transportation, healthcare, prepaid, unattended and many other markets. Hypercom solutions enable businesses in more than 100 countries to securely expand their revenues and profits.

Forward-Looking Statements
This press release includes statements that may constitute forward-looking statements that are subject to the safe harbor provisions of the Section 27A of the Securities Act of 1933 and Section 21G of the Securities Exchange Act of 1934. The words "believe," "expect," "anticipate," "estimate," "will," and other similar expressions identify such forward-looking statements. These forward-looking statements include, among other things, statements regarding Hypercom`s anticipated financial performance, projections regarding future revenue, operating profits, net income, cash flows, gains or losses from discontinued operations and the performance and market acceptance of new products. Readers are cautioned that these forward-looking statements are only predictions and may differ materially from actual future events or results. Readers are referred to documents filed by Hypercom with the Securities and Exchange Commission, specifically the most recent reports on Forms 10-K, 10-Q, and 8-K, each as it may be amended from time to time, which identify important risk factors that could cause actual results to differ from those contained in the forward-looking statements.

Among the important factors or risks that could cause actual results to differ from those contained in the forward-looking statements in this press release are: the state of the competition in the payments processing industry in general; the commercial feasibility of new products, services, and market development initiatives; risks relating to the introduction of new products; projections regarding specific demand for our products and services; projections regarding future revenues, cost of sales, operating expenses, margins, cash flows, earnings, working capital and liquidity; the adequacy of our current facilities and management systems infrastructure to meet our operational needs; the status of our relationship with and condition of third parties upon whom we rely in the conduct of our business; the challenges presented by conducting business on an international basis; the sufficiency of our reserves for assets and obligations exposed to revaluation; our ability to identify and complete acquisitions and strategic investments and successfully integrate them into our business; the impact of current litigation matters, including the shareholder class action and shareholder derivative actions, on our business; our ability to effectively hedge our exposure to foreign currency exchange rate fluctuations; risks associated with utilization of contract manufacturers of our products; industry and general economic conditions; and future access to capital on terms that are acceptable, as well as assumptions related to the foregoing.

The financial information contained in this press release should be read in conjunction with the consolidated financial statements and notes thereto included in Hypercom`s most recent reports on Form 10-K and 10-Q, each as it may be amended from time to time. Hypercom`s results of operations for the three months ended June 30, 2006, are not necessarily indicative of Hypercom`s operating results for any future periods. Any projections in this press release are based on limited information currently available to Hypercom, which is subject to change. Although any such projections and the factors influencing them will likely change, Hypercom is under no obligation, nor do we intend to, update the information, since Hypercom will only provide guidance at certain points during the year. Such information speaks only as of the date of this release.

Hypercom does not endorse any projections regarding future performance that may be made by third parties.

Hypercom and Optimum & Design are registered trademarks of Hypercom Corporation. All other trademarks are the property of their respective owners. HYCF

Hypercom Corporation
Scott M. Tsujita, 602-504-5161
stsujita@hypercom.com

Hypercom is a registered trademark of Hypercom Corporation. Optimum and Design is a trademark of Hypercom Corporation. Intel is a registered trademark of Intel Corporation. All other products or services mentioned in this document are trademarks, service marks, registered trademarks or registered service marks of their respective owners. This press release includes statements that may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding market acceptance of new products, product performance, product sales, revenues and profits. These forward-looking statements are based on management’s current expectations and beliefs and are subject to risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. In particular, factors that could cause actual results to differ materially from those in forward-looking statements include, industry, competitive and technological changes; the loss of, and failure to replace any significant customers; the composition, timing and size of orders from and shipments to major customers; inventory obsolescence; market acceptance of new products and services; the performance of suppliers and subcontractors; risks associated with international operations and foreign currency fluctuations; the state of the U.S. and global economies in general and other risks detailed in our filings with the Securities and Exchange Commission , including the Company`s most recent 10-K and subsequent 10-Qs. Forward-looking statements speak only as of the date made and are not guarantees of future performance. We undertake no obligation to publicly update or revise any forward-looking statements. HYCP

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Asset, Cash flow, Cash flow statement, Financial ratio, Income

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